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For 3QFY2011, IOB reported a strong set of numbers, registering robust growth
of 127.7% yoy and 12.4% qoq in net profit to `232cr, above our estimates of
`183cr on account of strong performance on the operating income front and
further improvement in asset quality. We maintain Buy on the stock.
Strong operating performance; better asset quality: Advances grew by 15.9%
qoq and 26.1% yoy to `100,129cr during the quarter. Deposits increased by
5.9% qoq and 17.7% yoy to `125,062cr. CASA deposits grew by 21.7% yoy but
declined by 0.9% qoq to `38,731cr. Consequently, CASA ratio fell to 31.0%
from 33.1% in 2QFY2011. Reported NIM increased by 25bp qoq to 3.27%
(3.02% in 2QFY2011 and 2.69% in 3QFY2010). Staff expenses increased by
15.1% sequentially to `484cr on account of DA hikes given to employees during
the quarter. The cost-to-income ratio improved to 45.7% v/s 50.0% in
2QFY2011 and 61.4% in 3QFY2010. Slippages for the quarter stood at
`183cr, implying an annualised slippage ratio of 0.9% v/s 3.7% in 2QFY2011.
Gross NPAs declined by 1.9% qoq to `3,265cr due to high deductions of `245cr
seen during 3QFY2011. The provision coverage ratio stood at 65.4% including
technical write-offs, and the bank will have to make additional provisions of
~`225cr in 4QFY2011 to meet the mandated 70% provision coverage ratio.
Outlook and valuation: We maintain our positive view on the stock, considering
the potential improvement in asset quality, earnings and RoE going forward,
along with IOB’s structurally reasonably healthy deposit franchise. Accordingly,
we have increased our earnings estimates for FY2011 and FY2012 by 15.6%
and 21.9%, respectively, and expect the bank to improve its RoE back again
from 11.5% in FY2010 to 17.0% in FY2012E. At the CMP, the stock is trading at
0.9x FY2012E P/ABV, which is below our target multiple of 1.15x for the stock.
We maintain our Buy rating on the stock with a Target Price of `166.
Improved asset quality
Slippages for the quarter stood at `183cr, implying an annualised slippage ratio of
0.9% compared to 3.7% in 2QFY2011. Gross NPAs declined by 1.9% qoq to
`3,265cr on account of high deductions of `244cr seen during 3QFY2011. Net
NPAs also declined by 15.7% qoq to `1,487cr. Consequently, gross NPA ratio
improved to 3.3% from 3.8% in 2QFY2011 and net NPA ratio improved to 1.5%
from 2.0% in 2QFY2011. The bank made provisions for NPA amounting to `302cr
during the quarter (`274cr in 2QFY2011). The restructured book as of 3QFY2011
stood at `7,600cr (7.6% of loan book) as compared to `7,155cr (8.3% of loan
book) in 2QFY2011.
During the quarter, the provision coverage ratio stood at 65.4% including technical
write-offs, compared to 60.0% as of 2QFY2011. The bank will have to make
additional provisions of ~`225cr in 4QFY2011 to meet the mandated 70%
provision coverage ratio.
Non-interest income above expectations
Non-interest income increased by healthy 35.9% yoy and by 27.9% qoq to `351cr
on account of recoveries amounting to `77cr during the quarter. The treasury
income grew by 34.1% yoy and 54.7% qoq to `23cr. Fee income grew by 18.5%
yoy but declined sequentially by 0.9% to `161cr during the quarter.
Operating expenses rise
Staff expenses increased by 15.1% qoq to `484cr on account of DA hikes given to
employees during the quarter. The bank’s gross liability arising out of second
pension option is `1,200cr–`1,300cr, which it is amortising over three years (as
against five years for most other banks). The bank provided `36cr as gratuity and
`108cr for pension liabilities in 3QFY2011 (`324cr for the first nine months) and
plans to maintain the same run-rate going forward. The cost-to-income ratio
improved to 45.7% compared to 50.0% in 2QFY2011 and 61.4% in 3QFY2010.
Investment arguments
Asset quality improving
Slippages for the quarter stood at `183cr, implying an annualised slippage ratio of
0.9% compared to 3.7% in 2QFY2011. Gross NPAs declined by 1.9% qoq to
`3,265cr on account of high deductions of `245cr seen during 3QFY2011. Net
NPAs also declined by 15.7% qoq to `1,487cr. Consequently, gross NPA ratio
improved to 3.3% from 3.8% in 2QFY2011 and net NPA ratio improved to 1.5%
from 2.0% in 2QFY2011. Recoveries and upgrades for the first three quarters
stand at `991cr and management expects this figure to touch ~`1,200cr by the
end of 4QFY2011. Management also targets to bring down gross NPA below
3.0% by FY2011E (gross NPA below `3,000cr).
We have factored in slippages at `1,774cr in FY2011E, implying a slippage rate of
2.2%, which is lower than `3,127cr of slippages (at a 4.2% slippage rate) that the
bank experienced in FY2010. NPA provisions/average assets are expected to
decline sharply to 0.2% in FY2012E as against 0.7% in FY2010. Consequently, the
bank’s RoE is expected to improve to 17.0% in FY2012E as against 11.5% in
FY2010.
Reasonable valuations
We maintain our positive view on the stock, considering the potential improvement
in asset quality, earnings and RoE going forward, along with IOB’s structurally
reasonably healthy deposit franchise. Accordingly, we have increased our earnings
estimates for FY2011 and FY2012 by 15.6% and 21.9%, respectively, and expect
the bank to improve its RoE back again from 11.5% in FY2010 to 17.0% in
FY2012E.
At the CMP, the stock is trading at 0.9x FY2012E P/ABV, which is below our target
multiple of 1.15x for the stock. We maintain our Buy rating on the stock with a
Target Price of `166.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian Overseas Bank – 3QFY2011 Result Update
Angel Broking maintains a Buy on Indian Overseas Bank with a Target Price of Rs. 166.
For 3QFY2011, IOB reported a strong set of numbers, registering robust growth
of 127.7% yoy and 12.4% qoq in net profit to `232cr, above our estimates of
`183cr on account of strong performance on the operating income front and
further improvement in asset quality. We maintain Buy on the stock.
Strong operating performance; better asset quality: Advances grew by 15.9%
qoq and 26.1% yoy to `100,129cr during the quarter. Deposits increased by
5.9% qoq and 17.7% yoy to `125,062cr. CASA deposits grew by 21.7% yoy but
declined by 0.9% qoq to `38,731cr. Consequently, CASA ratio fell to 31.0%
from 33.1% in 2QFY2011. Reported NIM increased by 25bp qoq to 3.27%
(3.02% in 2QFY2011 and 2.69% in 3QFY2010). Staff expenses increased by
15.1% sequentially to `484cr on account of DA hikes given to employees during
the quarter. The cost-to-income ratio improved to 45.7% v/s 50.0% in
2QFY2011 and 61.4% in 3QFY2010. Slippages for the quarter stood at
`183cr, implying an annualised slippage ratio of 0.9% v/s 3.7% in 2QFY2011.
Gross NPAs declined by 1.9% qoq to `3,265cr due to high deductions of `245cr
seen during 3QFY2011. The provision coverage ratio stood at 65.4% including
technical write-offs, and the bank will have to make additional provisions of
~`225cr in 4QFY2011 to meet the mandated 70% provision coverage ratio.
Outlook and valuation: We maintain our positive view on the stock, considering
the potential improvement in asset quality, earnings and RoE going forward,
along with IOB’s structurally reasonably healthy deposit franchise. Accordingly,
we have increased our earnings estimates for FY2011 and FY2012 by 15.6%
and 21.9%, respectively, and expect the bank to improve its RoE back again
from 11.5% in FY2010 to 17.0% in FY2012E. At the CMP, the stock is trading at
0.9x FY2012E P/ABV, which is below our target multiple of 1.15x for the stock.
We maintain our Buy rating on the stock with a Target Price of `166.
Strong growth in advances and deposits
Advances grew by 15.9% qoq and by 26.1% yoy to `100,129cr. Deposits
increased by 5.9% qoq and 17.7% yoy to `125,062cr. The credit-deposit ratio
stood at 80.1% compared to 73.1% in 2QFY2011. The incremental CD ratio stood
at 198.6% on account of higher-than-industry qoq growth in advances.
CASA deposits increased by 21.7% yoy but declined by 0.9% qoq to `38,731cr.
Consequently, CASA ratio declined to 31.0% from 33.1% in 2QFY2011. Saving
account deposits increased by 22.6% yoy to `30,346cr. Demand deposits
increased by 18.8% yoy to `8,835cr. During the quarter, the bank’s NII grew
strongly by 42.3% yoy and 18.2% qoq to `1,130cr on account of a substantial
25bp qoq increase in reported NIMs to 3.27% (3.02% in 2QFY2011 and 2.69% in
3QFY2010). For FY2012E, we estimate advances and deposits to grow by 18.0%
and 20%, respectively.
Improved asset quality
Slippages for the quarter stood at `183cr, implying an annualised slippage ratio of
0.9% compared to 3.7% in 2QFY2011. Gross NPAs declined by 1.9% qoq to
`3,265cr on account of high deductions of `244cr seen during 3QFY2011. Net
NPAs also declined by 15.7% qoq to `1,487cr. Consequently, gross NPA ratio
improved to 3.3% from 3.8% in 2QFY2011 and net NPA ratio improved to 1.5%
from 2.0% in 2QFY2011. The bank made provisions for NPA amounting to `302cr
during the quarter (`274cr in 2QFY2011). The restructured book as of 3QFY2011
stood at `7,600cr (7.6% of loan book) as compared to `7,155cr (8.3% of loan
book) in 2QFY2011.
During the quarter, the provision coverage ratio stood at 65.4% including technical
write-offs, compared to 60.0% as of 2QFY2011. The bank will have to make
additional provisions of ~`225cr in 4QFY2011 to meet the mandated 70%
provision coverage ratio.
Non-interest income above expectations
Non-interest income increased by healthy 35.9% yoy and by 27.9% qoq to `351cr
on account of recoveries amounting to `77cr during the quarter. The treasury
income grew by 34.1% yoy and 54.7% qoq to `23cr. Fee income grew by 18.5%
yoy but declined sequentially by 0.9% to `161cr during the quarter.
Operating expenses rise
Staff expenses increased by 15.1% qoq to `484cr on account of DA hikes given to
employees during the quarter. The bank’s gross liability arising out of second
pension option is `1,200cr–`1,300cr, which it is amortising over three years (as
against five years for most other banks). The bank provided `36cr as gratuity and
`108cr for pension liabilities in 3QFY2011 (`324cr for the first nine months) and
plans to maintain the same run-rate going forward. The cost-to-income ratio
improved to 45.7% compared to 50.0% in 2QFY2011 and 61.4% in 3QFY2010.
Investment arguments
Asset quality improving
Slippages for the quarter stood at `183cr, implying an annualised slippage ratio of
0.9% compared to 3.7% in 2QFY2011. Gross NPAs declined by 1.9% qoq to
`3,265cr on account of high deductions of `245cr seen during 3QFY2011. Net
NPAs also declined by 15.7% qoq to `1,487cr. Consequently, gross NPA ratio
improved to 3.3% from 3.8% in 2QFY2011 and net NPA ratio improved to 1.5%
from 2.0% in 2QFY2011. Recoveries and upgrades for the first three quarters
stand at `991cr and management expects this figure to touch ~`1,200cr by the
end of 4QFY2011. Management also targets to bring down gross NPA below
3.0% by FY2011E (gross NPA below `3,000cr).
We have factored in slippages at `1,774cr in FY2011E, implying a slippage rate of
2.2%, which is lower than `3,127cr of slippages (at a 4.2% slippage rate) that the
bank experienced in FY2010. NPA provisions/average assets are expected to
decline sharply to 0.2% in FY2012E as against 0.7% in FY2010. Consequently, the
bank’s RoE is expected to improve to 17.0% in FY2012E as against 11.5% in
FY2010.
Reasonable valuations
We maintain our positive view on the stock, considering the potential improvement
in asset quality, earnings and RoE going forward, along with IOB’s structurally
reasonably healthy deposit franchise. Accordingly, we have increased our earnings
estimates for FY2011 and FY2012 by 15.6% and 21.9%, respectively, and expect
the bank to improve its RoE back again from 11.5% in FY2010 to 17.0% in
FY2012E.
At the CMP, the stock is trading at 0.9x FY2012E P/ABV, which is below our target
multiple of 1.15x for the stock. We maintain our Buy rating on the stock with a
Target Price of `166.
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