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Rahul Ginodia

Indian Bank (BSE: 532814) is a US $14 billion public sector bank. It is based out of Southern India with a focus on priority sector lending. The bank does most of its business in the non-urban market where the competition is low but the risks are comparatively higher. It has implemented Core Banking Solutions (CBS) across all its branches in India which allows the bank to offer anywhere banking to its customers. The bank has recovered well from the financial setbacks of 1990s to emerge as a strong bank with one of the highest Return on Assets (1.62% as on March 31, 2009) and Return on Net Worth (23.36% as on March 31, 2009) in the Indian banking industry.^[1]

In a time when most banks have cut back on their lending and are finding it difficult to manage their profitability, Indian Bank with its focus on agriculture credit and Small and Medium Enterprises (SME) lending saw its total business grow over 23% year-on-year to Rs. 1,244.13 billion in FY2009 driven by 29% growth in advances and 19% growth in deposits.^[2] Strong demand for credit from the agriculture and SME sector helped the bank in growing its loan book. ‘Movement Banyan Vriksh’ launched by the bank to mobilize Current and Savings Bank accounts aided the bank in opening over one million accounts during FY2009 and in the process provided the bank with low cost funds, which helped in maintaining a net interest margin (NIM) of 3.54% in FY2009.^[3]

While most banks across the globe have seen their net Non-Performing Assets (NPAs) skyrocket, Indian Bank’s conservative lending practice and prudent risk management helped in reducing its NPAs to 0.18% in FY2009 from 0.24% in FY2008.^[4] Since its restructuring in early 2000s, the bank has been focusing on managing its NPA, improving its operating efficiency and quality of assets. The bank has consistently managed to recover its bad debt. In FY2009, it recovered Rs. 4.6 billion of bad debt and this helped in containing both Gross NPAs as well as Net NPAs of the bank. ^[5]

Corporate Overview

History

Indian Bank was established on August 5, 1907, as part of the Swadeshi movement.^[6] As a part of the bank nationalization program undertaken by the Government of India (GOI) in 1969, Indian Bank was nationalized along with 13 others. Indian Bank experienced some financial setbacks in the 1990s when the RBI and GOI introduced a new set of norms for the banking sector. The bank incurred losses during the period FY1996 to FY2001. In the mid to late-1990s, the gross NPA of Indian Bank constituted about 37% of the gross advances, the highest among public sector banks. The bank underwent massive restructuring during the period 2002-2003. Over 25% of Indian Bank's business since its inception had been done in the three year period between 2000 and 2003. Indian Bank posted its first net profit in six years in FY2002. The bank reduced its Net NPA levels significantly from around 16% in 1999 to 6.15% in 2003.^[7] As on March 31, 2009, Indian Bank’s Net NPA stood at a mere 0.18% of Net credit.^[8]

The Bank, which is headquartered in Chennai, has strengths in both retail and corporate banking. The bank turned 100% Core Banking Solution (CBS) compliant during FY2008.^[9] As on March 31, 2009, the bank had 1,642 branches, 63 extension counters, and 755 ATMs across India. The Bank has two foreign branches – at Singapore and Colombo, and a Foreign Currency Banking Unit in Colombo.^[10]

Business and Financial Metrics

Source : Company Reports

Indian Bank Total Revenue and Net Income in the last five years.^[11]

In FY2009, Indian Bank earned total revenue of Rs. 78.66 billion, a 26.49% rise over FY2008 primarily driven by strong growth in its interest income. The total revenue of the Bank have grown at a CAGR of 22.94% between FY2005 to FY2009. Being a bank focused on the non-urban market it earns most of its revenues in the form of interests. Gross interest earned was Rs. 68.30 billion or 86.84% of total revenues and was made up of a) Interest/discount on advances/bills of Rs. 50.87 billion, b) Income on investments of Rs. 16.87 billon, c) Interest on balances with Reserve Bank of India and other inter-bank funds of Rs. 0.562 billion and Others of Rs. 0.8 million. The remainder 13.16% of total revenues was Other Income of Rs. 10.35 billion, which is made up of a) Recovery of bad debts, b) Profit on sale of investment and c) Other non interest income.^[12]

Though most banks have been experiencing a fall in demand for credit, Indian Bank saw a 29% y-o-y growth in advances to Rs.518.31 billion as at March ’09. It also managed to grow its deposits by 19% y-o-y to Rs. 725.82 billion as at March ‘09. The strong growth in deposits helped the bank in having a strong liquidity position. Total assets have grown at a CAGR of 20.40% during FY05-FY09. The share of demand deposits in total deposits was 31.58%. Its current account and savings account (CASA) deposits as a percentage of total deposits decreased slightly from 32.30% as at March 31, 2008 to 31.58% at March 31, 2009, with savings account deposits increasing by 17.69% during fiscal 2009. The bank has launched an initiative to improve CASA, which will also provide it with cheap capital to grow its loan book and maintain its high NIM. Current account deposits grew 11.65% in FY2009 over FY2008 ^[13]. The Bank has about 1.8% market share in deposits.^[14]

In FY2009, the company posted consolidated net profit of Rs. 12.45 billion, up from Rs. 10.09 billion in FY2008 driven by improvement in operational efficiency and quality of assets. The Bank was also helped by lower provisioning and employee cost in FY2009. Its net profit has grown at a CAGR of 32.17% in the last five financial years. In FY09, net interest earned by Indian Bank was Rs.26.08 billion, up 27.00% from $20.53 in FY08, driven by strong growth in loans and improvement in NIM. ^[15]

In October 2008, Standard & Poor's, the international rating agency, assigned BBB-long term and A-3 short term counterparty rating to Indian Bank as an indicator of the performance of the Bank in the areas of capital adequacy, asset quality and risk management.^[16]

Business Segments

Indian Bank Total Revenue and Operating Profit Breakdown by Segment during the year 2008-2009.^[17]

Retail Banking (38.92% of Revenues, 39.35% of Operating Profit)

In FY2009, retail banking revenue of the Bank increased 51.89% to Rs. 30.61 billion from Rs. 20.15 billion registered in FY2008 driven by growth in its housing loans and personal loans. The Bank increased its Personal Segment Loan exposure by 22.95% to Rs 96.64 billion and Home Loan Exposure by 24% to Rs 50.96 billion during FY2009. Operating profit from retail banking rose 61.21% to Rs. 8.77 billion in FY2009 from Rs. 5.44 billion in FY2008.^[18]

The Bank introduced wealth management services to offer advice to HNIs. The Bank also offers third party products like mutual funds, life insurance and health insurance through its select branches.^[19]

During the financial year 2008-09, the total number of customer base increased by 1.783 million to 21.821 million from 20.038 million in FY 2008.^[20]

Corporate Banking (29.10% of Revenues, 29.93% of Operating Profit)

In FY2009, corporate banking revenue of the Bank increased 14.74% to Rs. 22.89 billion from Rs. 19.95 billion recorded in FY2008. Advances to the corporate and commercial sector increased 31.35% to Rs. 25.87 billion in FY2009 from Rs. 19.70 billion in FY2008. Operating profit from corporate banking rose 30.15% to Rs. 6.67 billion in FY2009 from Rs. 5.13 billion in FY2008.^[21]

Treasury (25.02% of Revenues, 23.40% of Operating Profit)

Advances Portfolio Distribution (as on 31st March, 2009)^[22]

In FY2009, Treasury operations revenue of the Bank increased 3.90% to Rs. 19.68 billion from Rs. 18.94 billion recorded in FY2008. Operating profit from treasury operations rose 59.04% to Rs. 5.21 billion in FY2009 from Rs. 3.28 billion in FY2008.^[23]

Other Banking Business (6.97% of Revenues, 7.32% of Operating Profit)

Revenue from other banking operations increased 74.21% to Rs. 5.48 billion in FY2009 from Rs. 3.15 billion recorded in FY2008. However, Operating profit from other banking business declined 40.62% to Rs. 1.63 billion in FY2009, from Rs.2.75 billion in FY2008.^[21]

The Bank has a public holding (other than promoters) of 20.0%, including 12.2% held by foreign institutional investors. As on March 31, 2009, promoter shareholding in the bank was 80.0%.^[24]

Total business of the Bank from international operations grew 41.49% to Rs. 58.93 billion in FY2009 from Rs. 41.65 billion in FY2008 driven by 36.52% growth in deposits and 46.74% growth in advances. Operating Profit from International Operations was up 61.59% to Rs. 93.27 billion in FY2009 from Rs. 57.72 recorded in FY2008.^[1]

Key Trends and Forces

Economic slowdown impacting the asset quality of banks

The global economic meltdown has resulted in asset quality challenges for banks. Banks have seen their asset quality deteriorate with rising defaults both in the corporate as well as the retail sector. Rating agency, Fitch believes that this could severely impact the Non-Performing Loan (NPL) ratios of Indian banks.^[25] The impact is expected to be slow but steady with NPLs rising over the next few quarters. Indian Bank seems to have managed it assets well. Both Gross NPAs and Net NPAs fell in FY2009 to 0.89% and 0.18% from 1.21% and 0.24% respectively in FY2008.^[1] The bank has managed to recover a large portion of its bad loans and this has helped in reducing its NPAs over the years. Also, the bank’s prudent reserving and risk management has aided in keeping its NPAs low compared to its peers.However, the fact that the bank has restructured a large portfolio of its advances means there is pressure on its asset quality and the NPAs could rise in the future. ^[26]

Interest rate volatility to impact Net Interest Margin

Interest rates have been volatile for the past one-and half year. In the first half of 2008 India was experiencing runaway inflation, which touched a new 13-year high of 11%^[27] on June 28, 2008 compared to 3.80% in January and to contain it the RBI had been increasing the Cash Reserve Ratio (CRR), repo rate (the rate at which banks borrow rupees from RBI) and the reverse repo rate (the rate at which Reserve Bank of India (RBI) borrows money from banks.) but with the global economy slowing in the second half it started cutting interest rates to boost the economy. Between Mid-October 2008 to May 2009, the RBI has cut its short-term lending rate by 425 basis points in six steps.^[28] With the steep fall in interest rates, the NIMs of the Indian banks have been impacted negatively as they had raised the deposit rates to above 8% in the first half of 2008 to shore up capital. Indian Bank on its part managed to reduce its cost of funds to 5.50% in FY2009 driven by low cost deposits and this helped in improving its NIM to 3.54% in FY2009.^[15]

Slow credit growth to hit Net Interest Income growth

Though interest rates have been cut in the last few months credit growth of most banks have been slowing down.^[29] Banks are have become cautious in their lending as they want to protect their asset quality. The slowing credit growth will reduce the NII of the banks and drag both their operating profit as well as net profit down. In such a scenario, Indian Bank saw a moderation in its loan growth to 28% in 4QFY09 from 38% recorded in 4QFY08.

Competition

• State Bank of India - State Bank of India, a public sector bank, is the largest bank in India. Besides personal and corporate banking, SBI is also involved in NRI (Non Resident Indian) services through its network in India and overseas. Its 11,000 branches and 5,600 automatic teller machines give it a reach throughout the length and breadth of the country; its work force of 200,000 dwarfs all other banks in India.^[30]

• ICICI Bank – ICICI Bank is India's largest private sector bank and second largest overall in terms of assets. Together with its subsidiaries, ICICI Bank offers a complete spectrum of financial services and products ranging from commercial banking to investment banking, mutual fund to insurance. The bank, headquartered in Mumbai, has a network of about 1,400 branches and 4,530 ATMs in India and a presence in 18 countries. ICICI Bank is also the largest issuer of credit cards in India.

• Punjab National bank - Punjab National Bank (PNB) is the second largest government-owned commercial bank in India with about 4,500 branches across 764 cities. This financial institution offers services in personal and corporate banking, including industrial, agricultural, and export finance, as well as international banking. It competes with Indian Bank mostly in retail lending and wholesale businesses.^[31]

• HDFC Bank - Housing Development Finance Corporation Limited Bank Limited or HDFC Bank is one of the largest private banks in India.^[32] The company competes with Indian Bank in each segment, over a wide range of banking services covering commercialand investment banking on the wholesale side and transactional/branch banking on the retail side.^[33] HDFC's Standard Life Insurance company competes with ICICI's insurance subsidiaries. Their mutual fund and asset management businesses are also in direct tussle.

• Bank of Baroda - Bank of Baroda is another private player. It has an edge over Indian Bank due to its rich countrywide network of over 2800 branches. It also has significant international presence with a network of 74 offices in 25 countries.^[34]

As on 31st March 2008, total advances was estimated at Rs. 21815.50 billions. Indian Bank with total advances of Rs. 398.39 billion had a market share of 1.83%.

Market Share by Total Advances as on 31st March, 2008.^[35]

All figures are as on 31st March, 2008 as per the respective Company's annual report.

References

1. ↑ ^{1.0 1.1 1.2} FY 2008-09 - Annual Results – Investor Presentation, Slide 15
2. ↑ FY 2008-09 - Annual Results – Investor Presentation, Slide 11
3. ↑ FY 2008-09 - Annual Results – Investor Presentation, Slide 9
4. ↑ Press release for quarter and year ended March, 2009, Page 13
5. ↑ Press release for quarter and year ended March, 2009, Page 10
6. ↑ Indian Bank website – Company Profile
7. ↑ resources/Articles/INDIAN BANK4.htm ICMR India
8. ↑ Press release for quarter and year ended March, 2009, Page 12
9. ↑ Indian Bank website – Chairman Speech
10. ↑ Press release for quarter and year ended March, 2009, Page 11
11. ↑ Segementwise Annual Report – 2009, Page 1
12. ↑ Audited Financial Results for the year ended March, 2009, Page 3
13. ↑ Press release for quarter and year ended March, 2009, Page 2
14. ↑ Indian Bank website – Press Release
15. ↑ ^{15.0 15.1} Indian Bank website – Press Release 3
16. ↑ Indian Bank website – Press Release
17. ↑ Segementwise Annual Report – 2009, Page 1
18. ↑ Press release for quarter and year ended March, 2009, Page 6
19. ↑ Press release for quarter and year ended March, 2009, Page 9
20. ↑ FY 2008-09 - Annual Results – Investor Presentation, Slide 25
21. ↑ ^{21.0 21.1} Segementwise Annual Report – 2009, Page 2
22. ↑ FY 2008-09 - Annual Results – Investor Presentation, Slide 15
23. ↑ Segementwise Annual Report – 2009, Page 1
24. ↑ Indian Bank website – Shareholding Pattern
25. ↑ Ayaanbayaan - fitch-asset-quality-downturn-in-2009-manageable-for-indian-banks
26. ↑ Press release for quarter and year ended March, 2009, Page 12
27. ↑ India Inflation rises to 11%
28. ↑ Economic Times - RBI cuts interest rates by 25 bps
29. ↑ Business Standard - credit-growth-slowest-in-five-years
30. ↑ Businessworld article on SBI
31. ↑ Punjab National Bank profile on Hoover's
32. ↑ HDFC Bank website
33. ↑ Livemint news article on HDFC
34. ↑ Bank of Baroda website
35. ↑ Profile of Banks Reserve Bank of India - A Profile of Banks : 2007-2008