Mukarram Bhagat of ASK Raymond James believes that India bank will have a very stable kind of net profit growth - between 20-25% a year over the next two years with high return on equity and return on assets.
Bhagat told"Indian Bank is a very attractively priced issue; at the issue price just about one time price to book value, that’s a very reasonable valuation. In terms of story, the interesting thing is that the case of restructuring where lot of the bad debts has been restructured and as a liabilities the capital has been reduced. As a consequence returns on equity is around 20%, return on average assets is 1.4-1.5%. These are very good figures - a thumb rule for return on average assets is minimum 1, if you are around 1.4, it's very good."
He further added, "Even a 16-17% return on equity is pretty good, so 20% and thereabouts is extremely good. Going forward there is a low credit deposit ratio, cost of funds will remain flat. In their investment portfolio, they have got large amount of recapitalization bonds, which earned them a coupon rate of 9.14%. The point is it just got restructured, it has got a low equity or capital base, it has got capital adequacy, the credit deposit ratio is just 70% and lot of banks are running at 90% because of high credit growth. So they won’t need more capital any further in a hurry. Given all that I think it will have a very stable kind of net profit growth between 20-25% a year over the next two years with high return on equity and return on assets. It is very attractively priced at one time."
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