Indian Bank (BSE: 532814) is a $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% in 2009) and Return on Net Worth (23.36% in 2009) in the Indian banking industry.
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. 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.
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. 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. 
Indian Bank, headquartered in Chennai, has strengths in both retail and corporate banking. In 2009, the bank had 1,642 branches, 63 extension counters, and 755 ATMs across India. As of March 31, 2010, the Bank operated 1,756 domestic branches, and 1,005 automated teller machines (ATMs), including 274 offsite ATMs. The Bank has two foreign branches in Colombo and Singapore.
Personal loans offered by Indian Bank include mainly home loans, automobile loans, personal loans, education loans, reverse mortgage, and loans against financial securities, such as deposits. It also offers wealth management services. The various deposit products offered include demand deposits, savings bank deposits and term deposits. The Bank has corporate agency tie up arrangements with United India Insurance Co. Ltd. for non-life insurance business and with HDFC Standard Life Insurance Co for life insurance business.
|Metric (in Billions INR)||2005||2006||2007||2008||2009|
|Total Interest Income||28.71||33.65||42.85||52.13||68.30|
|Non - Interest Income||5.72||5.31||8.23||10.06||10.36|
|Net Interest Income||12.58||14.42||17.82||20.54||26.09|
|Cost Income Ratio||57.77%||54.72%||47.85%||45.77%||38.83%|
|Return on Average Assets (%)||1.08%||1.16%||1.46%||1.64%||1.62%|
Source : Company Reports
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 has grown at a compound annual growth rate (CAGR) of 22.94% between FY2005 to FY2009. As a bank focused on the non-urban market, it earns most of its revenues in the form of interest. 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.
Though most banks have experienced a fall in demand for credit, Indian Bank saw a 29% y-o-y growth in advances to Rs.518.31 billion in March 2009. It also managed to grow its deposits by 19% y-o-y to Rs. 725.82 billion in March 2009. The strong growth in deposits helped the bank secure 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% on March 31, 2008 to 31.58% on 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 . The Bank has about 1.8% market share in deposits.
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. 
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.
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.
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.
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.
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.
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.
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.
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%.
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.
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. Fitch Ratings believes that this could severely impact the Non-Performing Loan (NPL) ratios of Indian banks. The impact is expected to be slow but steady with NPLs rising over the next few quarters. Indian Bank seems to have managed its 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. 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 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. 
Interest rates have been volatile for the two years. In the first half of 2008 India was experiencing runaway inflation, which touched a new 13-year high of 11% 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 cut its short-term lending rate by 425 basis points in six steps. 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.
Though interest rates have been cut in the last few months credit growth of most banks have been slowing down. Banks 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.
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%.