Indian Overseas Bank – 2QFY2011 Result Update Angel Broking

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  Indian Overseas Bank  – 2QFY2011 Result Update

Angel Broking maintains an Accumulate on Indian Overseas Bank with a Target Price of Rs186.

For 2QFY2011, Indian Overseas Bank (IOB) posted net profit growth of 2.8%

qoq and 17.1% yoy to `206cr, above our estimates of `183cr on account of

higher-than-expected non-interest income at `275cr as against our estimate of

`184cr. We maintain an Accumulate rating on the stock.

Operating performance in line; slippages continue to be high: During

2QFY2011, advances grew by 4.1% qoq and 12.3% yoy, while deposits grew by

7.9% qoq and 8.0% yoy. CASA deposits increased by 27.6% yoy. As a result of

flat term deposits on a yoy basis, the CASA ratio improved substantially from

28.0% in 2QFY2010 to 33.1% in 2QFY2011. However, on a sequential basis,

the CASA ratio remained flat. Calculated NIM was flat sequentially at 2.86%.

Consequently, NII grew by 5.5% qoq and 21.9% yoy to `956cr. Excluding

treasury, non-interest income rose by 49.1% qoq and 17.0% yoy. Gross

slippages increased to ~`750cr in 2QFY2011 from `354cr in 1QFY2011.

During the quarter, gross NPAs declined by 6.8% qoq due to good recoveries

and upgrades; and net NPAs fell by 1.7% qoq. The provision coverage ratio,

including technical write-offs, improved to 60.2% from 57.9% in 1QFY2011.

Outlook and valuation: At the CMP, the stock is trading at relatively attractive

valuations of 1.2x FY2012E ABV of `143 (v/s a five-year range of 1.1x–1.4x

and average of 1.3x) compared to the bank’s peers, which are trading at 1.3x

FY2012E ABV. IOB has a CASA ratio of 33.1%, one of the highest amongst

peers, which is especially favourable given the rising interest rate scenario.

We maintain a positive view on the stock, considering the potential improvement

in asset quality, earnings and RoE going forward, along with IOB’s structurally

strong deposit franchise relative to peers. Hence, we maintain an Accumulate

rating on the stock with a Target Price of `186, indicating an upside potential of

10.7% from current levels.

Investment arguments

Asset quality expected to improve

IOB resorted to large restructuring since July 2009. Hence, the bank expects large

upgrades from those accounts from 2QFY2011, as the one-year moratorium gets

over. Thus, we expect the bank to report much lower restructured assets from

3QFY2011.

Secondly, management is targeting `1,500cr+ of recoveries during FY2011E,

which we believe will significantly help in bringing down the provision burden.

Management is also targeting to control slippages below `1,300cr. However, we

have factored in slippages at `1,935cr in FY2011E, implying a slippage rate of

2.4%, which is still higher than our estimates for the bank’s peers under our

coverage, but lower as compared to `3,127cr of slippages (at a 4.2% slippage

rate) that the bank experienced in FY2010.

As a result, NPA provisions/average assets are expected to decline sharply to 0.4%

in FY2012E as against 0.7% in FY2010. Consequently, the bank’s RoE is expected

to improve to 14.3% in FY2012E as against 11.5% in FY2010.

Reasonable valuations

At the CMP, the stock is trading at relatively attractive valuations of 1.17x FY2012E

ABV of `143 (v/s a five-year range of 1.1x–1.4x and average of 1.3x) compared to

the bank’s peers, which are trading at 1.3x FY2012E ABV. IOB has a CASA ratio

of 33.1%, one of the highest amongst peers, which is especially favourable given

the rising interest rate scenario. We maintain a positive view on the stock,

considering the potential improvement in asset quality, earnings and RoE going

forward, along with IOB’s structurally strong deposit franchise relative to peers.

Hence, we maintain an Accumulate rating on the stock with a Target Price of `186,

indicating an upside potential of 10.7% from current levels.