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Core, operating income lesser than expectation, higher provisioning
dents bottom-line
In Q3 FY12, Indian Overseas Bank’s (IOB) NII grew 8% YoY to ` 12.2bn —
5% lesser than our estimate of ` 12.8bn. Operating profit grew merely by
2.3% YoY to ` 8.2bn, as against our estimate of ` 9.3bn. Much higher
provisioning dented bottom-line to ` 1.1bn compared to our estimate of `
3bn and consensus estimate of Rs 2.7bn.
IOB reported higher business growth than expected; however, there was
decline in margin to 2.61% as against 3.27% in Q3 FY11 and 2.86% in Q2
FY12. Higher liabilities cost impacted core income as well as margins.
Non-interest income was below than our expectation due to lesser than
expected cash recoveries which restricted operating profit growth. An
unexpected drop in bottom-line came mainly due to the higher provisioning
for restructured accounts and investment depreciation.
The gross slippage ratio decline on sequential basis to 2.36% from 3.7% in
Q2 FY12. Sequentially, NPL provisioning was lower, reflecting in the higher
net NPA ratio. Overall, the results were below than expectations on account
of lesser NII, cash recoveries and higher provisions.
We reduce our earnings estimates by 19% and 7% for FY12 and FY13 and
reduce our Price target by 10% to ` 122. We reiterate our Buy rating on the
stock. At current price, it quotes at 0.6x ABV FY13.
Robust business growth: IOB’s business grew 33% YoY to ` 3tn. Deposits and
gross advances grew 33.5% and 32.4% to Rs 1.7tn and ` 1.3tn respectively. The
credit-deposit ratio increased to 79.4% from 77.7% in Q2 FY12. On the credit book
side, the agriculture, retail and SME sectors were the key contributors to growth.
On the deposits side, CASA share declined to 26.15% from 30.97% in Q3 FY11
and 27.5% in Q2 FY12 on account of a 42.9% YoY jump in term deposits.
For FY12, we expect deposit growth of 21.9% YoY. Moderation in deposit mobilization
could aid CASA share. We factor in flat CASA share in FY12 and FY13. We expect
business to grow 22.5% YoY on the back of 21.9% growth in deposit mobilization
and 23.1% in credit book.
Decline in margin: Higher growth in term deposits has led to a 172 bps YoY
increase in cost of deposits, leading to a 66 bps decline in NIMs to 2.61% in Q3
FY12 (3.27% in Q3 FY11 and 2.86% in Q2 FY12). In FY12, the IOB management
expects to maintain margin around 3% (3.11% in FY11). However, we estimate
higher deposit mobilisation, slackness in credit demand and re-pricing of liabilities
would add further strain on margins, which may drift down by 21 bps to 2.61% (on
yearly average basis) in FY12.
Lesser cash recoveries and higher overheads resulted in contained operating
profit: In this quarter, other income grew by 17% to ` 4.1bn, primarily on account
of 47% YoY growth in fee income, 53.5% YoY jump in profit from sale of investment.
The recovery of written-off accounts declined by 72.7% to ` 210mn (` 770mn in Q3
FY11 and ` 644mn in Q2 FY12). Total operating expenses rose 19.6% YoY to `
8.1bn, mainly due to 12.8% YoY growth in employees’ expenses; C-I ratio rose to
49.6% from 45.7% in Q3 FY11 and 46.5% in Q2 FY12. Hence, operating profit grew
merely by 2.3% YoY to ` 8.2bn, as against our estimate of ` 9.3bn.
Higher provisioning dents bottom-line: In Q3 FY12, the bank’s NPL provisioning
increased by 86.3% to ` 6.7bn compared to ` 3.6bn in Q3 FY11 and ` 6.4bn in Q2
FY12. Sequentially, NPL provisioning was lower, reflecting in the higher net NPA
ratio. In Q3 FY12, bank’s credit cost declined to 1.01% as against 1.34% in Q3
FY11 and 1.72% in Q2 FY12. Higher than expected provisioning of ` 2.1bn for NPV
loss on restructuring accounts and ` 842mn as against ` 387mn in Q3FY11 on
account of investment depreciation losses led to deviation on bottom-line level.
Stable asset quality on sequential basis; but uncertainty remains on
restructuring front: In Q3 FY12, the bank’s gross NPAs rose 21.7 YoY and 2%
QoQ to ` 39.7bn. In percentage terms, GNPA declined to 3.0% from 3.26% in Q3
FY11 and 3.07% in Q2 FY12; whereas net NPA ratio decline to 1.23% from 1.51%
in Q3 FY11 and rose slightly from 1.21% in Q2 FY12. PCR remained stagnant at
71.7% on QoQ basis.
The restructured loans as on end-Q3 FY12 were at ` 101bn. On sequential basis,
gross slippage ratio came down to 2.36% from 3.7% in Q2 FY12. The slippages in
this quarter were mainly from infrastructure, sugar and textile industry. Overall, the
bank’s asset quality was largely stable on sequential basis.
Although the IOB management expects that by the end of March 2012, gross
NPAs would remain flat at current levels on the back of higher recoveries. In FY12,
we expect IOB’s gross slippage ratio to increase to 2.5%. We expect credit cost to
slightly increase to 1.13% in FY12 from 1.06% in FY11.
Valuation
We reduce our earnings estimates by 19% and 7% for FY12 and FY13 and reduce
our target price by 10% to ` 122. We reiterate our Buy rating on the stock. At
current price, it quotes at 0.6x ABV FY13.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Core, operating income lesser than expectation, higher provisioning
dents bottom-line
In Q3 FY12, Indian Overseas Bank’s (IOB) NII grew 8% YoY to ` 12.2bn —
5% lesser than our estimate of ` 12.8bn. Operating profit grew merely by
2.3% YoY to ` 8.2bn, as against our estimate of ` 9.3bn. Much higher
provisioning dented bottom-line to ` 1.1bn compared to our estimate of `
3bn and consensus estimate of Rs 2.7bn.
IOB reported higher business growth than expected; however, there was
decline in margin to 2.61% as against 3.27% in Q3 FY11 and 2.86% in Q2
FY12. Higher liabilities cost impacted core income as well as margins.
Non-interest income was below than our expectation due to lesser than
expected cash recoveries which restricted operating profit growth. An
unexpected drop in bottom-line came mainly due to the higher provisioning
for restructured accounts and investment depreciation.
The gross slippage ratio decline on sequential basis to 2.36% from 3.7% in
Q2 FY12. Sequentially, NPL provisioning was lower, reflecting in the higher
net NPA ratio. Overall, the results were below than expectations on account
of lesser NII, cash recoveries and higher provisions.
We reduce our earnings estimates by 19% and 7% for FY12 and FY13 and
reduce our Price target by 10% to ` 122. We reiterate our Buy rating on the
stock. At current price, it quotes at 0.6x ABV FY13.
Robust business growth: IOB’s business grew 33% YoY to ` 3tn. Deposits and
gross advances grew 33.5% and 32.4% to Rs 1.7tn and ` 1.3tn respectively. The
credit-deposit ratio increased to 79.4% from 77.7% in Q2 FY12. On the credit book
side, the agriculture, retail and SME sectors were the key contributors to growth.
On the deposits side, CASA share declined to 26.15% from 30.97% in Q3 FY11
and 27.5% in Q2 FY12 on account of a 42.9% YoY jump in term deposits.
For FY12, we expect deposit growth of 21.9% YoY. Moderation in deposit mobilization
could aid CASA share. We factor in flat CASA share in FY12 and FY13. We expect
business to grow 22.5% YoY on the back of 21.9% growth in deposit mobilization
and 23.1% in credit book.
Decline in margin: Higher growth in term deposits has led to a 172 bps YoY
increase in cost of deposits, leading to a 66 bps decline in NIMs to 2.61% in Q3
FY12 (3.27% in Q3 FY11 and 2.86% in Q2 FY12). In FY12, the IOB management
expects to maintain margin around 3% (3.11% in FY11). However, we estimate
higher deposit mobilisation, slackness in credit demand and re-pricing of liabilities
would add further strain on margins, which may drift down by 21 bps to 2.61% (on
yearly average basis) in FY12.
Lesser cash recoveries and higher overheads resulted in contained operating
profit: In this quarter, other income grew by 17% to ` 4.1bn, primarily on account
of 47% YoY growth in fee income, 53.5% YoY jump in profit from sale of investment.
The recovery of written-off accounts declined by 72.7% to ` 210mn (` 770mn in Q3
FY11 and ` 644mn in Q2 FY12). Total operating expenses rose 19.6% YoY to `
8.1bn, mainly due to 12.8% YoY growth in employees’ expenses; C-I ratio rose to
49.6% from 45.7% in Q3 FY11 and 46.5% in Q2 FY12. Hence, operating profit grew
merely by 2.3% YoY to ` 8.2bn, as against our estimate of ` 9.3bn.
Higher provisioning dents bottom-line: In Q3 FY12, the bank’s NPL provisioning
increased by 86.3% to ` 6.7bn compared to ` 3.6bn in Q3 FY11 and ` 6.4bn in Q2
FY12. Sequentially, NPL provisioning was lower, reflecting in the higher net NPA
ratio. In Q3 FY12, bank’s credit cost declined to 1.01% as against 1.34% in Q3
FY11 and 1.72% in Q2 FY12. Higher than expected provisioning of ` 2.1bn for NPV
loss on restructuring accounts and ` 842mn as against ` 387mn in Q3FY11 on
account of investment depreciation losses led to deviation on bottom-line level.
Stable asset quality on sequential basis; but uncertainty remains on
restructuring front: In Q3 FY12, the bank’s gross NPAs rose 21.7 YoY and 2%
QoQ to ` 39.7bn. In percentage terms, GNPA declined to 3.0% from 3.26% in Q3
FY11 and 3.07% in Q2 FY12; whereas net NPA ratio decline to 1.23% from 1.51%
in Q3 FY11 and rose slightly from 1.21% in Q2 FY12. PCR remained stagnant at
71.7% on QoQ basis.
The restructured loans as on end-Q3 FY12 were at ` 101bn. On sequential basis,
gross slippage ratio came down to 2.36% from 3.7% in Q2 FY12. The slippages in
this quarter were mainly from infrastructure, sugar and textile industry. Overall, the
bank’s asset quality was largely stable on sequential basis.
Although the IOB management expects that by the end of March 2012, gross
NPAs would remain flat at current levels on the back of higher recoveries. In FY12,
we expect IOB’s gross slippage ratio to increase to 2.5%. We expect credit cost to
slightly increase to 1.13% in FY12 from 1.06% in FY11.
Valuation
We reduce our earnings estimates by 19% and 7% for FY12 and FY13 and reduce
our target price by 10% to ` 122. We reiterate our Buy rating on the stock. At
current price, it quotes at 0.6x ABV FY13.
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