IOB: NPLs decline despite high slippage: Kotak Sec

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Indian Overseas Bank (IOB)
Banks/Financial Institutions
NPLs decline despite high slippage; loan growth improving. IOB reported mixed
performance for 2QFY11 – slippages were high, but strong recoveries/ upgradation
resulted in NPLs declining. Loan growth has also started to pick up and is marginally
ahead of industry average YTD. We continue to remain positive and expect the traction
of recoveries to get strong, while slippages are expected to come down going forward.
Valuations at 1XFY2012E PBR remain very attractive, despite the recent upmove.
Maintain BUY with TP `200 (from `160 earlier) valuing the bank at 1.3X FY2012E PBR.






Gross NPLs decline 7% qoq but higher write-offs/upgradations mask 3.7% slippage in 2QFY11
While the quarter was expected to see higher slippages compared to 1QFY11 given that agri NPLs
were yet to be classified as NPLs, the higher slippages of 3.7% (`7.6 bn) come as a bit of
disappointment. Nearly 20% of the slippages were from agri NPL (`1.7 bn) and about a third from
restructured portfolio. However, higher recoveries/upgradations of `5.1 bn compared to `3.9 bn
reported in June 2010 offers comfort that the improvement in loan portfolio is underway. Gross
NPLs were `33.3 bn (3.8%, declining 7% qoq) as of September 2010 while net NPLs declined by
2% qoq to `17.6 bn. Write-offs of `5 bn (2.4% of loans) provided cushion on reported gross
NPLs. Loan loss provisions remained high at 1.3% of loans providing for fresh slippages (mainly
agri) and increasing provision coverage ratio (including write-off) to 60% (58% in June 2010).

Sequential growth in loans ahead of industry average - a key positive
On a yoy basis, advances growth at 12% and deposits growth at 8% appears fairly low but IOB is
clearly showing better trends on YTD basis at 9% in deposits and 7% in loans. We expect the
bank to grow in line with the industry in FY2011E. CASA ratio has remained flat at 33% with
savings deposits growth at over 22% yoy. CD ratio for the quarter was flat at about 75%
compared to 76% in June 2010.

Margins increases to 3% with a positive bias going forward
Net interest income (NII) in 2QFY11 increased by 22% yoy (6% qoq) to `9.6 bn, resulting in NIMs
expanding by another 8 bps qoq to 3%, despite lending yields showing a marginal decline, which
we presume is due to higher slippages reported in the current quarter. However, with better repricing
of advances and lower slippages, we see further headroom to improve NIMs from current
levels.