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Indian Overseas Bank (IOB)
Banks/Financial Institutions
Migration-related slippages remain high. IOB’s reported earnings were flat despite
healthy growth in revenues (38% yoy). Slippages were at 3.3% with nearly 50%
migration-related. Higher provisions in 2HFY12E would keep earnings under pressure.
Revise TP to `160 (from `190 earlier) to reflect downward earnings revisions (5-6%)
and possible capital infusion at a discount to current book. The stock is inexpensive at
0.6X book and 4X EPS delivering 25% PAT growth for FY2011-13E and RoEs of 15%.
Earnings under pressure as provisions remain high on the back of higher slippages
IOB’s reported earnings were flat at `2.06 bn despite strong revenue growth (38% yoy) and preprovisioning
operating profit growth (47% yoy) as provisions doubled yoy. Higher loan-loss
provisions and investment depreciation resulted in weak earnings growth. Slippages were high at
3.3% for the quarter with nearly 50% coming from the migration exercise. Adjusted slippages are
broadly in line with the underlying trends in macro environment. Expect recovery trends to
improve post completion of the current exercise as machinery shifts back to asset quality from
growth.
FY2012E earnings growth to be low as one-off provisions yet to be completed
We expect FY2012E earnings growth at 15% yoy due to one-off provisions that are yet to be
provided: (1) `2.9 bn related to counter-cyclical buffers (to meet the regulatory requirements of
70% as of September 2010 levels), (2) `0.8 bn (representing the balance amortization from the
acquisition of Suvarna Sahakari Bank in FY2010).
We have revised our TP to `160 (from `190 earlier) valuing the bank at 0.9X book and 6X
FY2013E EPS primarily for (1) capital infusion (at current price) through a preferential placement to
GoI expected to happen at a substantial discount to the current book value. The bank’s tier-1
capital is fairly low at 7% (excluding 1HFY12 profits), (2) we have revised our estimates
downwards by 5% levels factoring the pending provisions in FY2012E and higher provisions in
FY2013-14E largely on the back of the current macro environment.
Slippages higher at 3.3% with 50% migration-related; coverage ratios stable qoq
Gross NPLs increased by 18% qoq to `39 bn (3.1% of loans) while net NPL increased 20% qoq to
`15 bn (1.2% of loans) as slippages remained high at 3.3% levels. Nearly 50% of the fresh
slippages for the quarter were driven by the migration exercise and 25% of the total slippages
were below `2.5 mn (72% PCR on these loans). Upgradation was strong for the quarter
cushioning the impact of higher slippages. Provisions were high on the back of these slippages and
we expect provisions at close to current levels as the bank is yet to make one-off provisions
relating to counter-cyclical buffer and the acquisition of the co-operative bank. Reported coverage
ratio was stable qoq at 72% which offers some comfort despite high slippages.
Expect loan growth to slow down as capital and NPLs are becoming a constraint
Loan growth traction continues to remain well above industry average with the quarter
witnessing yet another strong performance 44% yoy (7% qoq, 12% YTD). We expect loan
growth to taper down from the current levels as capital is becoming a constraint (7% tier-1
ratio excluding 1HFY12 profits) and the management is likely to shift focus to improve asset
quality trends.
Strong balance sheet growth is putting tremendous pressure on CASA, which is clearly not
keeping pace with growth - a trend likely to reverse as focus shifts to improve profitability.
Overall deposits grew 39% yoy with CASA ratio at 28% (flat qoq but down from 33% in
September 2010).
NIMs flat 2.9% despite higher slippages as benefit of loan re-pricing continues
NIMs were flat 2.9% despite increase in cost of deposits and higher de-recognition of
interest income as the bank benefitted from sharp re-pricing of loans. Loan yields improved
45 bps qoq to 10.9% while investment yields improved 13 bps to 7.4%. We maintain our
cautious outlook on NIMs for the bank as it is getting impacted by the change in asset and
liability profile that is increasing focus on the wholesale business.
Other highlights for the quarter
Cost-income ratio for the quarter was at 47% on the back of higher non-staff costs.
Tier-1 capital is at 7.0% with overall capital adequacy ratio at 12.4%, excluding the
impact of 1HFY12 profits. Qoq decline in tier-1 capital is a bit higher-than-expected
(despite balance sheet growth), probably reflecting higher stress in balance sheet.
Non-interest income growth was strong at 55% yoy driven by higher fee income and
income from recoveries. The bank reported a treasury profit of `490 mn.
Tax rate was lower at 23% as the bank is taking benefits from loan write-offs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian Overseas Bank (IOB)
Banks/Financial Institutions
Migration-related slippages remain high. IOB’s reported earnings were flat despite
healthy growth in revenues (38% yoy). Slippages were at 3.3% with nearly 50%
migration-related. Higher provisions in 2HFY12E would keep earnings under pressure.
Revise TP to `160 (from `190 earlier) to reflect downward earnings revisions (5-6%)
and possible capital infusion at a discount to current book. The stock is inexpensive at
0.6X book and 4X EPS delivering 25% PAT growth for FY2011-13E and RoEs of 15%.
Earnings under pressure as provisions remain high on the back of higher slippages
IOB’s reported earnings were flat at `2.06 bn despite strong revenue growth (38% yoy) and preprovisioning
operating profit growth (47% yoy) as provisions doubled yoy. Higher loan-loss
provisions and investment depreciation resulted in weak earnings growth. Slippages were high at
3.3% for the quarter with nearly 50% coming from the migration exercise. Adjusted slippages are
broadly in line with the underlying trends in macro environment. Expect recovery trends to
improve post completion of the current exercise as machinery shifts back to asset quality from
growth.
FY2012E earnings growth to be low as one-off provisions yet to be completed
We expect FY2012E earnings growth at 15% yoy due to one-off provisions that are yet to be
provided: (1) `2.9 bn related to counter-cyclical buffers (to meet the regulatory requirements of
70% as of September 2010 levels), (2) `0.8 bn (representing the balance amortization from the
acquisition of Suvarna Sahakari Bank in FY2010).
We have revised our TP to `160 (from `190 earlier) valuing the bank at 0.9X book and 6X
FY2013E EPS primarily for (1) capital infusion (at current price) through a preferential placement to
GoI expected to happen at a substantial discount to the current book value. The bank’s tier-1
capital is fairly low at 7% (excluding 1HFY12 profits), (2) we have revised our estimates
downwards by 5% levels factoring the pending provisions in FY2012E and higher provisions in
FY2013-14E largely on the back of the current macro environment.
Slippages higher at 3.3% with 50% migration-related; coverage ratios stable qoq
Gross NPLs increased by 18% qoq to `39 bn (3.1% of loans) while net NPL increased 20% qoq to
`15 bn (1.2% of loans) as slippages remained high at 3.3% levels. Nearly 50% of the fresh
slippages for the quarter were driven by the migration exercise and 25% of the total slippages
were below `2.5 mn (72% PCR on these loans). Upgradation was strong for the quarter
cushioning the impact of higher slippages. Provisions were high on the back of these slippages and
we expect provisions at close to current levels as the bank is yet to make one-off provisions
relating to counter-cyclical buffer and the acquisition of the co-operative bank. Reported coverage
ratio was stable qoq at 72% which offers some comfort despite high slippages.
Expect loan growth to slow down as capital and NPLs are becoming a constraint
Loan growth traction continues to remain well above industry average with the quarter
witnessing yet another strong performance 44% yoy (7% qoq, 12% YTD). We expect loan
growth to taper down from the current levels as capital is becoming a constraint (7% tier-1
ratio excluding 1HFY12 profits) and the management is likely to shift focus to improve asset
quality trends.
Strong balance sheet growth is putting tremendous pressure on CASA, which is clearly not
keeping pace with growth - a trend likely to reverse as focus shifts to improve profitability.
Overall deposits grew 39% yoy with CASA ratio at 28% (flat qoq but down from 33% in
September 2010).
NIMs flat 2.9% despite higher slippages as benefit of loan re-pricing continues
NIMs were flat 2.9% despite increase in cost of deposits and higher de-recognition of
interest income as the bank benefitted from sharp re-pricing of loans. Loan yields improved
45 bps qoq to 10.9% while investment yields improved 13 bps to 7.4%. We maintain our
cautious outlook on NIMs for the bank as it is getting impacted by the change in asset and
liability profile that is increasing focus on the wholesale business.
Other highlights for the quarter
Cost-income ratio for the quarter was at 47% on the back of higher non-staff costs.
Tier-1 capital is at 7.0% with overall capital adequacy ratio at 12.4%, excluding the
impact of 1HFY12 profits. Qoq decline in tier-1 capital is a bit higher-than-expected
(despite balance sheet growth), probably reflecting higher stress in balance sheet.
Non-interest income growth was strong at 55% yoy driven by higher fee income and
income from recoveries. The bank reported a treasury profit of `490 mn.
Tax rate was lower at 23% as the bank is taking benefits from loan write-offs.
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