Microsec Research29th January 2013

- On a restructuring mode- On a restructuring mode

Theme for growth

• Branch expansion• Capital Infusion• Restructuring the balance sheet profile

Analyst - Sanjeev JainPhone - 033-3051-2174Email Id - sjain@microsec.in

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Initiating Coverage Report

Strong BuyPRICE TARGET - INR245

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Contents Pages

29th January 2013

Microsec Research

Strong BUY Indian Bank Ltd.

Source: Company, ACE Equity, Microsec Research

We Initiate Coverage on Indian Bank with a Strong BUY rating. Our ratingunderpins the bank’s strong business growth momentum, growth inprofitability, diversified revenue stream, improving core income or Net InterestIncome (NII) led by improving low cost deposits base and increasing creditgrowth, increasing PAN India presence, improving Net Interest Margin (NIM),improving asset quality with healthy Provision Coverage Ratio (PCR), strongreturn ratios, well capitalized among the PSBs, innovative use of technologiesand last but not least bank’s business are in line with regulator’s guideline.

Indian Bank has a strong Return Ratio. Despite challenging environment, it hasdelivered RoE and RoA of ~20% and 1.33% for FY12. We expect the bank maymaintain its Return Ratios in the coming years backed by the expectations ofhealthy loan growth coupled with decline in cost of capital and expenses whichleads to improvement in its profitability.

On the basis of P/B, Indian Bank is one of the cheapest stock amongst PSBs. Atthe CMP of INR202, the stock is trading at FY12 P/BV of 0.80x. The currentvaluations of 0.73x FY13E and 0.64x FY14E Book Value looks attractive. Werecommend a BUY on the stock with a target price of INR245 (0.78x FY14E BV)with an upside of ~21% from the current level with an investment horizon of 12months.

Sector- Banking

0329th January 2013

Indian Bank was established as a part of Swadeshi movement on 15 August1907. The bank provides a wide spectrum of banking products and services. Ithas network of around 2000 branches and 1295 ATMs all over India. On theglobal landscape, it has a branch presence in Singapore, Colombo and Jaffna. Italso has 240 correspondent banks in 70 countries. Indian Bank has subsidiarieslike Indbank Merchant Banking Services, IndBank Housing and IndFundManagement Ltd. Indian Bank is one of the leading bank in rural developmentwhich reflects by its numbers of winning awards in this area.

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Company Background

Indian Bank was established as a part of Swadeshi movement on 15 August 1907 andnationalized by the Government of India in the year 1969. The bank provides a wide spectrumof banking products and services. It has a network of around 2000 branches and 1295 ATMs inall over India.

Global Landscape

On global landscape, the bank has come a long way since then, with 2002 branches locatednationwide within India and Overseas branches in Singapore, Colombo and Jaffna. It also has240 correspondent banks in 70 countries.

Subsidiary Companies

Apart from its banking services, Indian Bank offers various other services through itssubsidiaries like:-

Indbank Merchant Banking Services Ltd. IndBank Housing Ltd and IndFund Management Ltd.

Rural Leadership

Indian Bank is one of the leading bank in rural development which reflects by its numbers ofwinning awards. The bank has received award from Honorable Union Minister of Finance forExcellence in Agricultural Lending. Apart from this, the bank also received the Best PerformerAward for Micro-Finance activities in Tamil Nadu and Union Territory of Pondicherry fromNational Bank for Agriculture and Rural Development (NABARD).

Financial Inclusion Plan Snapshot

Indian Bank has been allotted 1523 villages with population above 2000 for provision ofbanking services, Under Financial Inclusion Plan. The bank has successfully provided bankingservices to all 1523 villages as on 30th September 2012.

Bank has opened 9.85 lakhs Basic Savings Bank Accounts in the FI implementing villagesand issued smart cards to the account holders. Under BC Model 8.91 lakhs Basic Savingsaccount have been opened and 7.89 lakh transactions amounting to INR57.68 crore have beencarried out in the villages.

Opening of one account per family, out of 12.58 lakh house holds to be covered in 1523villages with population above 2000, 10.92 lakh house holds are covered.

As advised by Govt. Of India, Bank has initiated a special drive for opening accounts ofmigrant labour and street vendors/hawkers who are working within 500 meters of the branchesin Urban and metro areas. As on 30.09.2012, accounts have been opened to 11,243 migrantlabourers and street vendors by the urban and metro branches.

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Board of Directors & Management Mr. T M Bhasin, Chairman & Managing Director

Mr. Bhasin has assumed charge as Chairman &Managing Director of Indian Bank on 1st April 2010.Prior to assuming charge as Chairman & ManagingDirector, he was an Executive Director of United Bankof India since 7th November 2007. He is an MBA(Finance) from University of Delhi and a Harvardalumnus having done Advanced ManagementProgramme at JFK School of Government, Harvard. Heis also an L.L.B. from Campus Law Centre, University ofDelhi and holds a Master’s Degree in Science.

Mr. B Raj Kumar, Executive Director

Mr. Kumar assumed charge as Executive Director of theBank on January 01, 2012. He started his career withAndhra Bank in 1978 and has more than 33 years ofexperience in serving the bank. He is a Post Graduate inEngineering with MBA and CAIIB.

Mr. Rajeev Rishi, Executive Director

Mr. Rajeev was appointed as Executive Director of theBank on October 01, 2010. He hails from Chandigarh(UT) and holds Bachelor’s degree in Arts and Law. Hewas a General Manager in Oriental Bank of Commercewith rich experience in banking and worked in variousparts of the country such as Chandigarh, Bhubaneshwar,Kolkata, Dehradun, Pune,Mumbai, Ludhiana, etc.

Mr. Shaktikanta Das, IAS, Director

Mr. Das, was nominated by the Government of India tothe Board of the Bank on December 09, 2009. He has aMaster’s Degree from St. Stephen’s College, Delhi. He isthe Additional Secretary (Budget) in Department ofEconomic Affairs, Ministry of Finance, Government ofIndia.

Mr. N Krishna Mohan, Director

Mr. Krishna was appointed as RBI Nominee Director ofthe Bank on May 30, 2011. He is the Chief GeneralManager, Department of Currency Management, RBI,Central Office, Mumbai w.e.f March 01, 2011. Hiseducational and professional qualifications are M.Sc.,Ph.D., CAIIB., and M.S (Econ). He holds Master’sDegree in Policy Economics from the University ofIllinois, USA and Doctorate from Osmania University,Hyderabad

Mr. M Jayanath, Director

Mr. Nath was appointed as the Workmen EmployeeDirector of the Bank by the Government of India andassumed charge on April 21, 2010. He joined the Bankon July 10, 1978. He has a Bachelor’s degree in Science.He is the General Secretary of the Karnataka Unit ofIndian Bank Employees’ Union.

Mr. Amarjit Chopra, Director

Mr. Chopra is appointed as Director of the Bank underChartered Accountant category on August 29, 2011. Apracticing Chartered Accountant from New Delhi, heholds Master's Degree in Commerce and a FellowMember of the Institute of Chartered Accountants ofIndia (ICAI).

Mr. Sanjay Maken, Director

Mr. Sanjay is a Practicing Chartered Accountant fromNew Delhi. He was appointed as a Part-Time Non-Official Director of the Bank by Government of India onAugust 11, 2011. He holds Bachelor's Degree inCommerce and is a Fellow Member of the Institute ofChartered Accountants of India.

Mr. M Butchi Rami Reddy, Director

Mr. Reddy was appointed as Part-time Non-officialDirector of the Bank by Government of India onSeptember 22, 2011. He is an Agriculturist and a wellknown Social Activist.

Prof. Narendra Kumar Agrawal, Director

Mr. Agarwal was elected as the Shareholder Director ofthe Bank for a second term on June 29, 2011. He isholding charge as Shareholder Director for a period of 3years from July 01, 2011. He holds B.E, MMS degreesand is a Fellow of IIM.

Mr. Chintaman Mahadeo Dixit, Director

Mr. Dixit was elected as the Shareholder Director of theBank on June 29, 2011. He assumed charge from July 01,2011 for a period of 3 years. He is a CharteredAccountant by profession since 1976. He is a CommerceGraduate of University of Pune and a fellow Member ofthe Institute of Chartered Accountants of India..

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The bank has exploited the innovations and advancements in technology for achieving thebusiness objectives and offers a wide variety of tech savvy products in tune with customerneeds. The bank has a new tag line as “Your Tech-Friendly Bank”. The bank is offeringfollowing facilities to its customers

Electronic Term Deposit Account (E-TDA) opening through net banking - Customershaving net banking facility can open term deposit accounts (FD/STD/RIP/RD/VRD)electronically by instant debit to the accounts through net banking. An electronicreceipt/acknowledgement is provided to the customer providing the details of depositopened.

Merchant payment integration through E-Billing solution (EBS) - Integrated with E-Billing Solutions(EBS) Pvt. Ltd. for online merchant transactions / utility paymentsthrough net banking facility covering around 2775 billers / merchants.

Collection of Andhra Pradesh State VAT/CST, Professional Taxes (PT) for Governmentof Maharashtra, Centralised Orissa VAT/CST payment, TN Regional TransportDepartment – Payment through e-payment module launched. Interbank Mobile paymentservices via J2ME Mobile Banking Facility. Tamil Nadu Electricity Bill payments throughSMS Mode.

Collection of Fees for Tamil Nadu Public Service Commission for Grade IV is afacilitated using Multiutility Module. Online fee collection for student of distanceeducation, University of Madras.

The Bank has implemented “FinDNA” - software for Anti Money Laundering (AML)monitoring.

Indian Bank is one of the Public Sector Banks that has strong fundamentals and thoughtfulbusiness strategy which differs from its peers. It has been increasing its presence towardfee based income by taking new Tech-Banking initiative. We believe this move willimprove its quality of services, strength customer relationship and improve its businessgrowth. Bank’s continued effort to enhance innovative use of technology may help it tomanage its increasing business and transaction volume with lesser manpower. Moreover, itis important for Indian Banks to provide excellent services with some significant valueaddition to retain old customers and attract new ones.

New Initiative Launched by Indian Bank

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Investment Rationale Advances growth continues to grow above industry loan growth

Indian Bank’s thoughtful business strategy and continued expansion of its branches and ATMshas helped the bank to maintain its advances growth above the industry’s growth. The bank hasa strong growth in advances at a CAGR of ~23% to ~INR90000 crores over the period ofFY2008-12, whereas, industry’s advances growth at a CAGR of ~20% is ~INR49 lakhs croresover the same period. Moreover, Over the past few quarters, the bank has been shift its focusfrom large corporate term loans to Retail and MSME segments. As on September 30, 2012, theRetail and MSME loan contain together ~27% of bank’s total loan portfolio which stood at~INR96000 crores. There was~15% YoY growth in its Retail and MSME loan portfolio. Webelieve that growth in retail portfolio coupled with offtake of past project sanctions andworking capital demand by corporates may help the bank to deliver credit growth of ~18% inFY14E to reach ~INR122000 crores.

Source: Company, Ace Equity, Microsec Research

The graph clearly indicates that despite challengingenvironment, Indian Bank has consistently performedwell above the industry. Bank thoughtful businessstrategy and continued expansion of its branches andATMs has helped it to maintain its advances growthabove the industry loan growth. We anticipate bank’sloan book to grow by ~14% in FY13E and 18% inFY14E, largely driven by Retail and MSME segmentsand disbursement of sanctioned infrastructure loans.

Industry Vs. Indian Bank

Indian Bank’s advances growth trend

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Indian Bank has reduced its exposure from riskier segmentand increased focus more towards secured retail businessand MSME lending. As on 30th September 2012, bank’sRetail and MSME loan contribution to total loan book stoodat 27%. Additionally, contribution from corporate book wasat 51% in the same period. We believe Focus on retailsegment not only improve the assets quality and margin butalso boost its non‐interest income owing to processing andother fees charges on retail products.

Source: Company, Microsec Research

As on 30th September 2012, growth in Retail and MSMEadvances were stood at ~14% YoY to INR25850 croreswhich contributes ~27% of bank’s total loan book.Whereas, bank has put bridle on its corporates &commercial advances, YoY growth was marginal ~7%,earlier, it was ~30% in the same period last year.Contribution of corporates & commercial advances werehalf of the bank’s total loan book. Moreover, Ruraladvances stood at INR15060 crores which contributes~16% of the total loan portfolio. We believe that the loanportfolio of the bank is healthy and the chances of theNPAs are less.

Segment wise YoY advances growth %

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Indian Bank has a healthy deposits franchise with strong low cost deposits base i.e CASAratio. As on 30th September 2012, the total deposits of the bank stood at INR131180crores out of which CASA deposits contributes ~INR38000 crores or ~29%. The bank’sCASA ratio is one of the best among its peers. It is mainly, because of its large no ofbranches. Bank is doing smooth business with its 2002 branches in all over India and it isexpected that this number may cross 2350 till FY14. Moreover, the bank has consistentlymaintained its deposit growth above the Industry over the past few years. We believethat the Bank may maintain its consistent performance in the coming years as well andits deposits growth for FY14 may be ~17%, which is ~1% higher than the industrydeposits growth rate. The bank’s thoughtful business strategy along with its presenceacross the nation and adaptation of advanced technologies and new innovations mayboost its business growth.

Healthy deposits franchise

We anticipatebank’s depositsgrowth of ~13%and ~17% forFY13E and FY14Erespectively. For theentire industry itmay be ~12% and~16% during thesame period.

Indian Bank’s deposits growth trend

Source: Company, Ace Equity, Microsec Research

Industry Vs. Indian BankBank’s IT initiativesaim to providehassle free,convenient and safetransactions facilityto further enhancethe customerservices and meetcustomers’expectations.

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Customer convenienceand high qualityservices through strongdistribution andinnovative use oftechnology continuedto be the bedrock ofbank’s growth strategy.

CASA deposits likely to improve

Source: Company, Ace Equity, Microsec Research

Over the past few years, there has been marginal decline in bank’s CASA deposits. It ismainly because of high inflation coupled with higher interest rate offered on termdeposits and also competition from some of the Private Sector Banks, which are offeringhigher saving deposits rate post its deregulation. However, despite challengingenvironment bank has consistently maintained its deposits growth well above theIndustry’s deposits growth rate. We believe the CASA deposits is likely to improvebacked by the expectation of revival in the economy and also softening of term depositsrate and its continue efforts to widen its presence all across the nation. Customerconvenience and high quality services through strong distribution and innovative use oftechnology may be the bedrock of the bank’s growth strategy.

Bank’s branch expansion is on the rise

CASA growth continues to rise

CASA deposits continue to rise

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Healthy contribution of core income to profitability

Bank’s widening presence all across the nation along with rebalanced its funding mix andfocus towards retail deposits base with customers convenience and high quality serviceshave boosted its core income. Net Interest Income (NII) of the bank grew at a CAGR of22.03% to INR4418 crores over the period of FY08-12. Whereas, Industry's NII grewmarginally higher at a CAGR of ~24% over the same period. We believe that bank’sincreasing number of branches and ATMs, innovative use of technology couple withcustomer convenience and hassle free services may help the bank to capture the standingopportunity of the industry. We anticipate NII may grow up by ~11% and ~20% inFY13E and FY14E respectively.

Contribution of NII to Total Income on the Rise

Contribution of NII to earnings is on the rise

Indian Bank’s NII growth trend

Source: Company, Ace Equity, Microsec Research

Indian Bank Vs. Industry

Decline in high costdeposits and growingno of branches whichleads to enhance thelow cost deposits basemay improve theinterest income of thebank.

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Indian Bank’s Net Interest Margin (NIM) has consistently been higher than theIndustry's average and also higher among its peers. Despite challenging environment, theBank has maintained its NIM above 3% from FY09 onwards. However, over the past fewquarters, margin has witnessed a decline due to slippages and restructuring couple withimpact of 25bps Base Rate cut in May 2012 and also increase in cost of deposits (due torepricing of term deposits at higher rate and marginal decline in CASA ratio). Webelieve, margin may be in the range of 3.15-3.20% in FY14E, supported by reduction indeposits cost (recently bank had reduced deposits rates across tenors and it may furthercool down in near term), improvement in CASA ratio and likely reductions in base ratefurther.

Quarterly Net Interest Margin (NIM) Trend

Margin are well above the Industry

Indian Bank Vs. Industry

Margin are well above amongst its peers

NIM to remain in therange of 3.15-3.20% inFY14E, which may behigher than the mostother PSBs and around32bps higher thanindustry average.

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Source: Company, Ace Equity, Microsec Research

Microsec Research

Asset quality is likely to improve, better Provision Coverage Ratio amongst peers

Source: Company, Ace Equity, Microsec Research

Bank’s asset quality is likely to improve.

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Over the past few quarters, asset quality of Indian Bank has deteriorated owing todownturn in macro and micro economies, high domestic inflation which leads to highcost of capital and also depreciation in INR. However, in comparison to many of its peers,Gross NPLs has been much lower for the bank over the past few years. Bank’s currentGNPA and NNPA stood at 2.06% and 1.33% respectively which is much lower than itspeers. Moreover, bank is in well positioned to tame any time liabilities with strong ~71%of its Provision Coverage Ratio (PCR). The coverage ratio of the bank is also better thanits peers.

Bank is focusing more towards Retail and MSME segment which is less risky. Out of itstotal loan book, Retail and MSME segment loan stood at ~27%, Rural exposure stood at~16% whereas, loan to Corporate & Commercial sector and Overseas credit stood at~51% and ~6% respectively. Bank has an infrastructure exposure of INR18333 crores,accounting for 19.1% of its total advances. Within infrastructure, power accounts for~11% of its total advances. Bank has an exposure to Tamil Nadu, Andhra Pradesh andMaharashtra SEBs and none of these entities has asked for restructuring and lookhealthy. However, bank has restructured ~INR2300 crores of loan pertaining toRajasthan and Haryana SEBs.

The loan portfolio of Indian Bank looks healthy. Bank doesn’t have exposure to stressedcompanies such as Kingfisher, Suzlon, Deccan Chronicale etc. Moreover, the bank is inwell position to tame any time liabilities with its strong ~71% of its PCR. we don’t expectany substantial shock in future. Moreover, likely reversal in interest cycle, bank’s lessexposure to stress sectors and also, continuing support from government to revive theailing sectors will improve its advances portfolio. The management also does not expectany significant restructuring in the near term and remains confident on the asset quality.

Quarterly asset quality trend.

The bank is wellpositioned to absorbsubstantial shockwith ~71% of itsProvision CoverageRatio (PCR).

Power exposure standat ~11% of its totaladvances.

No or Low exposure tostressed companies.

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Bad debts recovery has been improved

Source: Company, Ace Equity, Microsec Research

Bank’s NPL coverage ratio is better than its peersBanks GNPA & NNPA ratios is better than its peers

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One of the well capitalized PSB

Indian Bank is well positioned to support its growth trajectory with strong CapitalAdequacy Ratio (CAR) of 12.96% and Tier-1 capital stood at 10.71% at the end ofSeptember 2012. Bank actively manages its capital to meet regulatory norms and currentand future business needs considering the risks in its businesses, expectation of ratingagencies, shareholders and investors, and the available options of raising capital.Moreover, the business expansion of the bank is not linked with the governmentfinances owing to higher government holding of ~80%. The board has already given itsapproval for equity dilution to the extent of 10% and bank is likely to come out with afollow-on-public offer (FPO). However, bank’s current capital structure indicates that itcan easily adopt the regulator’s recent BASEL III norm.

Indian Bank is well-placedto comply with RBI’sguidelines on theimplementation of theBasel III framework inIndia.

Basel III RequirementA minimum common equitytier I capital of 5.5%, aminimum tier 1 capital ratioof 7.0% of risk weightedassets, a capital conservationbuffer of 2.5% comprisingonly common equity capitaland a minimum overallcapital adequacy ratio of9.0%.

The Basel III regulationswould be implemented inphases beginning from 1st

April 2013 and would befully implemented by March31, 2018.

Strong government holding, best amongst its peers

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Source: Company, NSE, Microsec Research

Indian Bank’s Capital Adequacy Ratio trend

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Source: Company, Ace Equity, Microsec Research

Non interest income is likely to grow

Bank’s non interest income has grown at a CAGR of 3.64% over the period of FY08-12whereas, Net Interest Income (NII) grew at a CAGR ~22% over the same period. As aresult, the proportion of non interest income to total income has declined. However, thebank has been increasing its presence toward fee based income by taking new Tech-Banking initiative, increasing its retail loan portfolio and presence across the nation. Webelieve that this move will improve quality of services, strength customer relationshipand also give an edge over others. We anticipate other income may remain subdued inFY13 owing to waiving of processing fee on product like housing and auto loan. ForFY14E, we anticipate ~12% growth in its other income to INR1388 crores. However,proportion of core income (NII) may be robust at ~80% in FY14 and this in turn maylower the proportion of non interest income to total income.

Proportion of coreincome (NII) may berobust at ~80% inFY14 and this inturn may lower theproportion of noninterest income tototal income despite~12% growth.

Microsec Research

Indian Bank probably, the best amongst PublicSector Banks (PSBs) has consistently reported astrong return ratios. Bank’s average ROA and ROEover the period of FY10-12 were 1.5% and ~21%respectively. Moreover, notwithstanding currentchallenging environment, bank has reported acommendable ROA of 1.32% as against ~1%reported by most of the PSBs during H1FY13E. Highdelinquencies and muted non‐interest income hasaffected the banks’ ROA. Moreover, Indian Bank hasconsistently reported more than 20% Return onEquity (ROE) which is higher than most of the PSBs.We anticipate that bank may maintain its ROA of~1.3% for FY13/14E. While, Return on Equity of~19% For FY13E and ~20% for FY14E.

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Rising profitability will Maintain the Return Ratios

Bank’s PAT likely to catch its past growth record Bank’s business may grow at a CAGR of ~16% to ~INR1.9 trillions

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Operationally efficient bank; Cost/Income ratio to inch up Marginally

Indian Bank has well managed its cost efficiency by maintaining its cost below 40% overthe past few years. The bank’s number of employees has significantly come down to18782 in FY12 from 19641 in FY10. Bank’s initiative to recruitment of new youngemployee in the replacement of retired employee has boosted the productivity of bank.Business per employee has gone up to INR4.8 crores in FY12 from INR3.2 crores inFY10. Whereas, assets per employee is up by INR7.5 crores in FY12 from INR5.2 croresin FY10.

However, management expects that operating cost is likely to increase owing to salaryhike in November and requirement of higher pension provision due to decline in G-Secyield. Moreover, the bank waived off processing fee on home loans and other retail loansegment which may affect its non interest income and also material increase in operatingexpenses may also increase its cost to income ratio. We anticipate, for FY13/14E, it maybe around 42-43%.

Improving Operating Cost

Cost/Income Ratio may go up to 42-43% Employee cost to opt expenses may be maintained

Assets Per Employee is on the rise Profit per employee is on the rise

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Indian Bank financial inclusion initiatives are well aligned with regulators guideline

Under Financial Inclusion Plan, Indian Bank has been allotted with 1523 villages withpopulation above 2000 for provision of banking services. All the 1523 villages have beenprovided with banking services as on 30th September 2012. Following are the initiativetaken by the bank to reached all 1523 allotted villages.

1425 villages through Smart card based Business Correspondent (BC) Model. 53 villages through Brick and mortar branches. 38 Banking Service Centers (BSCs). 45 villages through Mobile Branch/Van.

Of the 587 villages with population 1600-2000 allotted, 52 villages have been providedbanking services through ICT based smart card enabled BC Model.

Bank has established 1425 Ultra Small Branches (USB) in the villages with populationabove 2000 covered through BC Model under Financial Inclusion.

Bank has opened 9.85 lacs Basic Savings Bank Accounts in the FI implementing villagesand issued smart cards to the account holders. Under BC Model 8.91 lacs Basic Savingsaccount have been opened and 7.89 lacs transaction amounting to INR57.68 crore havebeen carried out in the villages.

Overdraft in SB NO frill accounts and General Credit Card (GCC) facilities also beenprovided to 3629 beneficiaries in the villages.

In the state of Tamil Nadu, Bank has been disbursing pension under Social SecuritySchemes(SSS) through Field Business Correspondents. Pension payment is made to 1.51lakh beneficiaries at their door steps in all the 986 villages with population above 2000allotted to Bank in the State.

Opening of one account per family: Out of 12.58 lakh house hold to be covered in 1523villages with population above 2000, 10.92 lakh house holds are covered.

Campaigns are being organized for providing one account per family in all the service areavillages.

As advised by Govt. of India, Bank has initiated a special drive for opening accounts ofmigrant labour and street vendors/hawkers who are working with in 500 meters of thebranches in Urban and metro areas. As on 30.09.2012, accounts have been opened to11,243 migrant labourers and street vendors by the urban and metro branches.

Moreover, bank has won SKOCH Financial Inclusion Award for completion of 100%Financial Inclusion in Union Territory of Pondicherry.

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Source: Company, Ace Equity, Microsec ResearchNote:- All figures are as on 31st March 2012, * and Return Summary as on 28th January 2013.

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Valuation and Recommendation

P/BV Band

We Initiate Coverage on Indian Bank with a Strong BUY rating. Our rating underpins the bank’sstrong business growth momentum, growth in profitability, diversified revenue stream, improvingcore income or Net Interest Income (NII) led by improving low cost deposits base and increasingcredit growth, increasing Pan-India presence, improving Net Interest Margin (NIM), improvingasset quality with healthy Provision Coverage Ratio (PCR), strong Return Ratios, well capitalizedamong the PSBs, innovative use of technologies and last but not least bank’s business are in linewith regulator’s guidelines.

Among the PSU peer banks, Indian Bank has better fundamentals and thoughtful business strategy,and strong Return Ratios. Despite challenging environment, it has delivered RoE and RoA of ~20%and 1.33% for FY12. We expect the bank may maintain its Return Ratios in the coming year backedby the expectations of healthy loan growth couplde with decline in cost of capital and expenseswhich leads to improvement its profitability. Bank’s continued effort to enhance innovative use oftechnology may help it to manage its increasing business and transaction volume with lessermanpower thereby reducing costs at the operational level.

Based on the price/book valuation methodology, Indian Bank is one of the cheapest stock amongstPSBs. At the CMP of INR202, the stock is trading at FY12 P/BV of 0.80x. The current valuations of0.73x FY13E and 0.64x FY14E Book Value looks attractive. We recommend a BUY on the stockwith a target price of INR245 (0.78x FY14E BV) with an upside of ~21% from the current level withan investment horizon of 12 months.

It is important forIndian Banks toprovide excellentservices with somesignificant valueaddition to retainold customers andattract new ones.

Valuation looks attractive, currently, bank is trading below its 3 year average P/BV

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Financials & Projections

Source: Company, Ace Equity, Microsec Research

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Financials & Projections

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Source: Company, Ace Equity, Microsec Research

Microsec Research

Key Concerns Further down turn in economic activities and growth may act as a vicious cycle oninvestment in Capex and consumer income and spending, which may impact the earnings ofthe company and also risk its asset quality.

Recent increment in provision on restructuring as per the RBI new guideline may impact theprofitability.

Issuing of new Banking license will increase the competition which may affect the bank’smargin.

Glimpse of Indian Bank’s Branches

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Microsec Research: Phone No.: 91 33 30512100 Email: microsec_research@microsec.in

Ajay Jaiswal: President, Investment Strategies, Head of Research: ajaiswal@microsec.in

Fundamental Research

Name Sectors Designation Email ID

Nitin Prakash Daga IT, Telecom & Entertainment AVP-Research npdaga@microsec.in

Naveen Vyas Midcaps, Market Strategies AVP-Research nvyas@microsec.in

Gargi Deb Agriculture & Pharma Research Analyst gdeb@microsec.in

Sutapa Roy Economy Research Analyst s-roy@microsec.in

Sanjeev Jain BFSI Research Analyst sjain@microsec.in

Anik Das Mid Cap Research Analyst adas4@microsec.in

Neha Majithia Mid Cap Research Analyst nmajithia@microsec.in

Soumyadip Raha Mid Cap Executive Research sraha@microsec.in

Saroj Singh Mid Cap Executive Research ssingh2@microsec.in

Technical & Derivative Research

Vinit Pagaria Derivatives & Technical VP vpagaria@microsec.in

Ranajit Saha Technical Research Sr. Manager rksaha@microsec.in

Institutional Desk

Dhruva Mittal Institutional Equities Sr. Manager dmittal@microsec.in

Puja Shah Institutional Desk Dealer pdshah@microsec.in

PMS Division

Siddharth Sedani PMS Research AVP ssedani@microsec.in

Ketan Mehta PMS Sales AVP ksmehta@microsec.in

Research: Financial Planning Division

Shrivardhan Kedia FPD Products Manager Research skedia@microsec.in

Research-Support

Subhabrata Boral Research Support Asst. Manager Technology sboral@microsec.in

Recommendation

Strong Buy >20%

Buy between 10% and 20%

Hold between 0% and 10%

Underperform between 0% and -10%

Sell < -10%

Expected absolute returns (%) over 12 months

MICROSEC RESEARCH IS ALSO ACCESSIBLE ON BLOOMBERG AT <MCLI>

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