HDFC Sec- Buy IOB (Indian Overseas Bank) -Technical picks

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Technicals: Indian Hotels, IOB, Zylog Systems, Lloyd Electric, Mangalam Cement, ING Vysya, DLF :: Business Line

IOB- Asset Quality concerns continue :: Karvy

Asset Quality concerns continue
In Q3FY13, Indian Overseas Bank’s (IOB) profits grew 7.6% YoY (down
26.5% QoQ) to Rs1.2 bn. Lower than our estimates of Rs1.8 bn on account
higher NPA provisions. NII grew 13.1% YoY (up 11% QoQ) to Rs 13.8 bn
and pre provision profits increased 23.7% YoY to Rs10.1 bn (up 26% QoQ)
higher than our estimate of Rs 8.8 bn. During the quarter, NIM improved
sequentially owing to increase in yield on advances and decline in cost of
deposits. However, asset quality continued its downward trend.
 Loan Growth remains robust: Advances grew at 18.8% YoY (up 3.1%
QoQ), while deposits grew at a slower pace of 11.1% YoY (down 1.9%
QoQ). Consequently, C‐D ratio increased 403 bps sequentially to 83.4%.
CASA ratio remained flat at 25%.
 Asset quality alarming: IOB’s asset quality continued to deteriorate
further owing to fresh slippages to Rs 10.9 bn (delinquency ratio of 2.8%).
Gross NPA increased 26 bps QoQ to 4.1% and net NPA increased 8 bps
QoQ to 2.3% It also restructured loans worth Rs 12.9 bn taking the
cumulative value of the restructured book to Rs 156 bn (10% of gross
loan book). Credit cost increased to 2.5% from 1.3% sequentially, while
its provision coverage ratio remained flat sequentially at 59%.
 NIM bottoms out: NIMs improved by 18bps sequentially to 2.51% as
yield on advances improved 32 bps QoQ to 10.5%; this was further
complimented by decline in cost of deposits by 10 bps QoQ to 7.58%.
Outlook & Valuation
We believe, IOB’s asset quality pressures are yet to bottom out which would
continue to weigh on the banks profitability. At the CMP, the stock is trading
at 5.7x and 4.5x FY14E and FY15E earnings respectively, while the P/ABV is
trading at 0.7x and 0.6x FY14E and FY15E respectively. We have
downgraded our earnings estimates for FY14 and FY15 by 18% and 14%
respectively, owing to heightened asset quality concern. We therefore reduce
our price target by 19% to Rs 78 valuing the stock at 0.6x FY15E P/ABV and
maintain our SELL rating.

Indian Overseas Bank ::Prabhudas Lilladher, Banks/Financials conference

􀂄 Growth Outlook: The bank is looking at growth of 20% YoY in FY13 higher than
projected by most other PSUs. The areas of focus are working capital finance,
SME and retail. The SME segment is expected to grow at 25%-30%. In large
corporates, roads sector offers some opportunity to grow + working capital
requirement for completed project will also aid growth.
􀂄 Asset Quality: The bank is looking at higher gross addition to NPA in FY13
against ~Rs32bn in FY12 (2.5% of advances). Though monsoon has improved offlate,
management highlighted that its Agri portfolio is more concentrated in
southern states which have mostly received adequate rainfall.
􀂄 Other highlights: (1)Bulk deposit for the bank is at ~28% and bank is allowing
some higher cost deposit to mature to comply with FinMin’s directive. (2)
Capital Infusion: Assuming 18%-20% growth, management expects ~Rs220bn of
capital requirement through FY18 and for FY13 management expects ~Rs15bn
of capital infusion by the government.

Indian Overseas Bank: TP: ` 122 Buy:: Dolat Cap

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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.

Hold Indian Overseas Bank; Target :Rs 94 ::ICICI Securities

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RATING....................................................................................... Changed from Buy to Hold
M o u n t i n g   p r o v i s i on s   t a k e   a   t o l l …
IOB registered disappointing PAT of | 108.3 crore, thereby recording 53.3%
YoY and 47.8% QoQ de-growth. PAT fell by | 276 crore due to restructuring
provisions; of which | 214 crore was  due to sacrifice in NPV while | 76
crore was due to interest income reversal, which affected NII. NII grew 8.1%
YoY to | 1222 crore while NIM dipped by 25 bps QoQ to 2.6%. Though
credit growth was strong and in line with estimates at 32.4% YoY, the
management has guided for modest  21% credit growth by FY12E. Noninterest income was healthy at 17% YoY growth to | 411 crore while the C/I
ratio jumped 318 bps QoQ to 49.6%. Gross NPA increased marginally by
1.9% QoQ to | 3972 crore while restructured assets grew 40.4% QoQ to
| 10082 crore. Provisions increased sharply by 86.3% YoY to | 667.4 crore.
In light of rising restructuring provisioning, we have increased FY12E and
FY13E provisions, thereby cutting our  PAT estimate by 11.7% to | 818.9
crore and 8% to | 1101.7 crore, respectively.
ƒ Telecom, power and media restructuring cause provisioning to rise…
Total restructured assets in Q3FY12 stood at | 10082 crore (7.6% of
advances) with | 2903 crore assets restructured during the quarter.
Provisions worth | 214 crore were made for this restructuring. The
bank had to make provisions worth | 180 crore for sacrifice in NPV for
restructuring of telecom infra players (exposure of | 1250 crore).
Power and media sector restructuring accounted for | 1000 crore and
| 295 crore, respectively. Small scale accounts of the textile and steel
sector also witnessed stress, thereby constituting 9% and 8.3%,
respectively, of the amount restructured during the quarter. The
management has guided that fresh restructuring during Q4FY12E shall
not exceed | 800 crore, excluding the Air India exposure.
ƒ NIM takes a hit, dips 66 bps YoY and 25 bps QoQ to 2.6%…
NIM took a hit as YoA dipped 10 bps QoQ to 10.8% on account of
interest income reversal worth | 76 crore due to restructuring. Even
the CASA ratio has plunged by 482 bps YoY to 26.12%, thereby
causing CoF to rise by 172 bps YoY and 14 bps QoQ to 7.3%.
V a l u a t i o n
In spite of high credit growth, NIM has consistently been under pressure
while restructured asset (forming 7.6% of advances) is denting profitability.
PAT is expected to remain volatile on account of provisions for couple of
quarters. We have valued the bank at 0.8xFY13E ABV with a target price of
| 94 and HOLD rating with a negative bias

QUERY CORNER: Sterlite Industries, UCO Bank, Mahindra Satyam, TVS Motor, Opto Circuits, GTL Infrastructure, Berger Paints, IOB ::Business Line

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Please advise me on the outlook for Sterlite Industries and UCO bank bought at Rs 130 and Rs 65 respectively.

K. Kunhiraman

Sterlite Industries (Rs 113.9): After peaking out in January 2010, Sterlite Industries has been on a long-term downtrend. In August 2011, the stock broke through a key support at Rs 150 and accelerated downwards. But, its long-term support at Rs 86 provided base in December 2011 and the stock changed its direction. Investors with long-term perspective can consider buying the stock on declines with stop-loss at Rs 86. A strong move above the immediate resistance at Rs 130 will take the stock northwards to Rs 150 and to Rs 165 in the long-term. Nevertheless, a tumble below Rs 86 will drag the stock down to the Rs 70 - 74 range.

Short-term trend has been up for the stock ever since bottoming out last month. But it is likely to face key resistance at Rs 120 in the days ahead. Failure to move above this resistance will pull the stock down to Rs 100. Significant supports below this level are at Rs 95 and Rs 86.

Indian Overseas Bank:: 2QFY2012 Result Update :: Angel Broking

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For 2QFY2012, Indian Overseas Bank (IOB) reported a weak performance with
muted net profit growth of 0.6% yoy, well below our as well as street expectation,
due to higher provisioning charges. Profit growth was also aided by a lower
effective tax rate (23.3%). We maintain our Accumulate view on the stock.
Strong business growth; but slippages double sequentially: During 2QFY2012,
business momentum for the bank was stronger than its peers, with sequential
advances and deposits growth of 4.5% (up 44.2% yoy) and 8.2% (up 38.5%
yoy), respectively. CASA deposits growth rate stood at 14.9% yoy, driven by
22.4% yoy growth in the more volatile current account deposits. Non-interest
income growth was healthy at 55.6% yoy to `427cr, with growth coming from all
sections. Cost of deposits for the bank increased by 40bp qoq to 7.2%. The qoq
rise in yield on advances (45bp) to 10.9%, however, managed to fully offset the
impact of cost of deposits, resulting in reported NIM remaining flat sequentially
at 2.9%. The bank’s asset quality deteriorated significantly during
2QFY2012, with provisioning charges increasing by 108.6% to `636cr.
For 2QFY2012, gross NPA ratio stood at 3.1% (2.8% in 1QFY2012) and net
NPA ratio stood at 1.2% (1.1%) in 1QFY2012. Provision coverage ratio
(including technical write-offs) weakened by ~173bp qoq to 71.8%.
Outlook and valuation: The bank had faced substantial asset-quality issues in
FY2010 due to which RoEs were depressed to 11.5%. From this low base, we
expect improvement in RoE to drive a 20.0% CAGR in earnings over FY2011-13E.
However, we also remain wary of further incremental asset-quality pressures that
could arise due to the bank’s aggressive lending to sensitive sectors over
2HFY2012. That said, at the CMP, the stock is trading at cheap valuations of 0.6x
FY2013E P/ABV, which provides margin of safety in our view. Hence, we maintain
our Accumulate rating on the stock with a target price of `107, valuing the stock
at 0.7x FY2013E ABV.

Buy Indian Overseas Bank; Target : Rs 117 ::ICICI Securities

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S l i p p a g e s   m o u n t ;   h i g h   p r o v i s i o n s   h i t   P A T   g r o w t h
IOB continues to grapple with asset  quality concerns as slippages rose
sharply by | 995 crore in Q2FY12 (| 485 crore in Q1FY12) pushing up GNPA
by 18% to | 3898 crore (GNPA ratio @ 3.07%). Out of the total slippages, |
498 crore slipped as the bank shifted loans below | 50 lakh to system based
NPA recognition system, thus shifting its entire portfolio to automated NPA
recognition. Consequently, higher  provisions for NPA bogged down PAT,
which was flat QoQ and YoY at | 207.5 crore. The core business
performance was strong with credit growth of 44.4% YoY, deposits up
38.5% YoY and NII rising 32% YoY to | 1266 crore after contracting by
2.3% QoQ in Q1FY12. Both CASA and NIM that declined last quarter were
stable QoQ at 27.5% and 2.86%, respectively, in Q2FY12. We expect
business growth of 20% CAGR to lead to 21% CAGR in NII over FY11-13E.
However, in light of higher-than-expected slippages & provisions we have
lowered FY12E and FY13E profit estimates by 21% and 4%, respectively.
ƒ Pre provisioning profit (PPP) up 47.3% YoY despite higher opex…
NII increased 32% YoY backed by sequentially flat NIM at 2.86%.
Other income grew a healthy 26% QoQ buoyed by fee income and
profit on sale of investments. Despite a sustained increase in opex (up
9% QoQ), PPP was up 47.3% YoY (13% QoQ) at | 906.8 crore.
ƒ Slippages high as bank completes automation of NPA recognition…
GNPA jumped 18% QoQ to | 3898 crore and NNPA rose 20% QoQ to
| 1505 crore due to high slippages of | 995 crore (| 498 crore due to
bank shifting loans below | 50 lakh to system based NPA recognition).
Consequently, provision for NPA was higher at | 463 crore with PCR at
71.7%. Restructured assets rose 7% QoQ to | 7179 crore while
slippages from restructured assets amounted to |229 crore in Q2FY12.
Although IOB has shifted to system based NPA, we expect slippages
to remain high and estimate GNPA of 2.8% & NNPA of 1.2% by FY13E.
V a l u a t i o n
Asset quality concerns have come to haunt IOB again after its much touted
turnaround in Q2FY11. Even though the bank has shifted its entire loan
portfolio to system based NPA resulting in higher slippages, we expect
slippages to stay high (albeit lower than | 995 crore seen in Q2FY12).
Recoveries and upgradations need to be monitored for a revival in asset
quality. We have revised our profit estimates on account of lower credit
growth guidance of 20% for FY12E and higher provisions. Hence, we
maintain our target multiple at 0.9x FY13E ABV and arrive at a TP of | 117

Indian Overseas Bank: Migration-related slippages remain high :: Kotak Sec,

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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%.

Indian Overseas Bank : 2QFY2012 result review Angel Broking

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Indian Overseas Bank
For 2QFY2012, Indian Overseas Bank (IOB) reported a weak set of results with net
profit growing by muted 0.6% yoy, well below ours as well as street’s expectation,
due to higher provisioning charges. Profit growth was also aided by a lower
effective tax rate (of 23.3%).
During 2QFY2012, the business momentum for the bank was stronger than the
industry’s, with sequential advances and deposits growth of 4.5% (up 44.2% yoy)
and 8.2% (up 38.5% yoy), respectively. Calculated NIM in 2QFY2012 was flat
compared to 1QFY2012, while CASA ratio witnessed a 10bp qoq decline to
27.5% in 2QFY2012. The bank’s asset quality deteriorated significantly during
2QFY2012, with provisioning charges increasing by 108.6% yoy to `636cr. For
2QFY2012, gross NPA ratio stood at 3.1% (2.8% in 1QFY2012) and net NPA ratio
stood at 1.2% (1.1% in 1QFY2012). The bank had migrated only accounts worth
`50lakhs to system-based NPA recognition system till 1QFY2012 and, hence, a
decline in asset quality was always on cards. Provision coverage ratio (including
technical write-offs) weakened by ~173bp qoq to 71.8%. At the CMP, the stock is
trading at 0.6x FY2013E ABV. We maintain our Neutral recommendation on the
stock.

Hold Indian Overseas Bank; Target :Rs142:: ICICI Securities

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M a r g i n s   s l i d e ,   p r o v i s i o n s  o n   t h e   h i g h e r   s i d e …
Pressure on NIM and higher provisioning for opex, NPA and a
countercyclical buffer remained an  overhang on Q1FY12 profits that
declined 52.7% QoQ to | 205.6 crore. Advances grew 44% YoY (4.7% QoQ)
to | 119147 crore while deposits rose 38% YoY (4.1% QoQ) to | 151173
crore. Sequential decline in CASA from 30% to 27.6% and rising CoF led to
NIM sliding from 3.16% in Q4FY11  to 2.85% in Q1FY12. Opex, which
declined 25% QoQ on a reversal of provisions of | 118 crore last quarter,
jumped 39% QoQ as the bank provided for proposed wage revision (| 27
crore/quarter). The bank also provided | 145 crore as provision for changed
asset quality norms and provided | 41  crore for countercyclical provision.
Slippages remained high and GNPA  rose 7% QoQ to | 3292 crore. We
expect slippages to remain high as the bank is yet to shift loans below | 50
lakh to system based NPA recognition (| 23000-24000 crore).
ƒ Trend reversal in asset quality: Slippages to step up…
GNPA rose 7% QoQ to | 3292 crore after declining for four
consecutive quarters while NNPA  declined 5% QoQ to | 1258 crore.
Moreover, recoveries and upgradations had been higher than
slippages since Q1FY11. However, reductions were lower than
slippages this quarter at | 283 crore and | 485 crore, respectively.
Recoveries from written off accounts were high at | 99.5 crore and
PCR rose to 73.5%. IOB is yet to shift loans below | 50 lakh to system
based NPA recognition (| 23000-24000 crore). We expect slippages to
remain high and estimate GNPA of 2.4% and NNPA of 1% by FY13E.
ƒ Leading to higher provisioning…
Provisions were up 243% YoY (22% QoQ) at | 597 crore on account of
higher provision for NPA (| 394.5 crore), provision for countercyclical
buffer (| 41 crore) and investments depreciation (| 53.3 crore). We
expect higher provisions in FY12E due to fresh slippages and countercyclical buffer provisions to dent profits.
V a l u a t i o n
IOB saw a turnaround in Q2FY11 with aggressive business growth and
consistently improving asset quality. However, we see credit growth
moderating to 21% YoY. We see pains in asset quality and higher credit
costs impacting return ratios in FY12-13E. We have factored in a dilution of
13% in FY12E, which has suppressed return ratios further. Hence, we are
valuing the stock at 1x FY13E ABV (valued at 1.1x earlier) at a target price of
| 142

INDIAN OVERSEAS BANK (IOB):: Target Price Rs 160: Kotak Sec,

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INDIAN OVERSEAS BANK (IOB)
RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.160
FY12E P/E: 6.6X; P/ABV: 1.0X

Q1FY12: NII rose 31% led by strong loan growth (43.6% YoY) despite
marginal dip in NIM (9 bps YoY); slippage came at 1.7%,
lower than 2.7% witnessed during FY11. We tweak our earnings
estimate and retain ACCUMULATE rating on the stock.
q IOB has delivered strong NII grew at 31.0% to Rs.11.88 bn in Q1FY12 on
back of strong loan growth (43.6% YoY) despite of decline in NIM (9 bps
YoY). However, net profit growth was marginal on back of higher provisions
(Rs.5.45 bn during Q1FY12 as compared to Rs.0.77 bn during
Q1FY11) despite strong growth in non-interest income (57.9% YoY) as
well as NII (31.0% YoY).
q IOB has to provide ~Rs.2.9 bn to meet the regulatory requirement of 70%
provision coverage ratio (as on September 2010) along with ~Rs.0.8 bn
(last tranch of amortization arising from the acquisition of Suvarna
Sahakari Bank in FY10) during next three quarters, which will moderate
the earnings growth during FY12E.
q Strong loan growth (43.6% YoY; 4.7% QoQ) on back of robust growth in
corporate and agriculture segments; deposit growth has come on back of
strong growth in term deposits which grew at 49.6% YoY (8.0% QoQ);
however, CASA deposits grew at moderate pace (14.9% YoY; -5.0%
QoQ), which led to decline in the CASA mix from 30.2% at the end of
Q4FY11 to 27.6% at the end of Q1FY12.
q Asset quality has stabilized; since Q4FY10, net NPA are on the downward
trajectory, positive in our view. In absolute terms, gross NPA declined
7.8% YoY (however, it increased by 6.5% QoQ). However, net NPA declined
both YoY as well as QoQ by 29.9% and 5.3%, respectively.
q During Q1FY12, slippage came at Rs.4.85 bn (1.7% on annualized basis).
Although it is on the higher side, it came below the average run-rate witnessed
during last 4 quarters (2.7% during FY11). We believe IOB has to
provide ~Rs.1.9 bn on account of meeting the RBI guidelines (to reach
70% coverage ratio based on September 2010 book)
q We have slightly tweaked our earnings estimate for FY12E; we We maintain
ACCUMULATE rating on the stock with TP of Rs.160 (Rs.162 earlier)
based on 1.25x its FY12E ABV.
NII came at 31.0%, mainly on back of strong loan growth (43.6%);
earnings likely to be muted on back of higher provisions during
next three quarters.
IOB has delivered strong NII grew at 31.0% to Rs.11.88 bn in Q1FY12 on back of
strong loan growth (43.6% YoY) despite of decline in NIM (9 bps YoY).
However, net profit growth was marginal on back of higher provisions (Rs.5.45 bn
during Q1FY12 as compared to Rs.0.77 bn during Q1FY11) despite strong growth in
non-interest income (57.9% YoY) as well as NII (31.0% YoY).
IOB has to provide ~Rs.2.9 bn to meet the regulatory requirement of 70% provision
coverage ratio (as on September 2010) along with ~Rs.0.8 bn (last tranch of amortization
arising from the acquisition of Suvarna Sahakari Bank in FY10) during next
three quarters, which will moderate the earnings growth during FY12E.


Strong loan growth (43.6% YoY; 4.7% QoQ); CASA mix declined
264 bps QoQ to 27.6% at the end of Q1FY12
The bank witnessed strong business growth of 40.5% YoY (4.4% QoQ) to Rs.2703.2
bn at the end of Q1FY12; both loan book as well as deposits grew 43.6% and
38.1%, respectively.
Strong loan growth came on the back of robust growth in corporate book. Other
segments like agriculture, retail and SMEs grew 42.1%, 32.2% and 30.9%, respectively.
Deposit growth has come on back of strong growth in term deposits which grew at
49.6% YoY (8.0% QoQ); however, CASA deposits grew at moderate pace (14.9%
YoY; -5.0% QoQ), which led to decline in the CASA mix from 30.2% at the end of
Q4FY11 to 27.6% at the end of Q1FY12.


Faster loan growth as compared to deposit growth led to improvement in the C/D
ratio from 75.8% at the end of Q4FY11 to 78.8% at the end of Q1FY12.
Buoyant non-interest income on back of healthy fee income as
well as robust recovery from W/O accounts.
Non-interest income was buoyant during Q1FY12 and grew at 57.8% YoY on back
of healthy fee income growth which grew 29.9% YoY as well as robust recovery
from W/O accounts (Rs.995 mn in Q1FY12 as against Rs.269 mn in Q1FY11). During
the same period trading profit was down by 51.4% YoY.


Asset quality has stabilized; slippage came at 1.7%, lower than
2.7% witnessed during FY11.
Asset quality has stabilized; since Q4FY10, net NPA are on the downward trajectory,
positive in our view. In absolute terms, gross NPA declined 7.8% YoY (however, it
increased by 6.5% QoQ). However, net NPA declined both YoY as well as QoQ by
29.9% and 5.3%, respectively.
Gross NPA and net NPA now stand at 2.76% and 1.08%, respectively, at the end of
Q1FY12. Its coverage ratio has reached to 73.5%, an improvement of 300 bps sequentially.
During Q1FY12, slippage came at Rs.4.85 bn (1.7% on annualized basis). Although
it is on the higher side, it came below the average run-rate witnessed during last 4
quarters (2.7% during FY11). We believe IOB has to provide ~Rs.1.9 bn on account
of meeting the RBI guidelines (to reach 70% coverage ratio based on September
2010 book)


Valuation and recommendation
We have slightly tweaked our earnings estimate for FY12E and now expect net
profit for FY12E to be 12.43 bn. This would result into an EPS of Rs.20.1 and ABV of
128.6 for FY12E. They have to provide ~Rs.2.9 bn to meet the regulatory requirement
of 70% provision coverage ratio (as on September 2010) along with ~Rs.0.8
bn (last tranch of amortization arising from the acquisition of Suvarna Sahakari Bank
in FY10) during next three quarters, which will moderate the earnings growth during
FY12E.
At the current market price of Rs.133, the stock is trading at 6.6x its FY12E earnings
and 1.0x its FY12E ABV. We maintain ACCUMULATE rating on the stock with TP of
Rs.160 (Rs.162 earlier) based on 1.25x its FY12E ABV.

Indian Overseas Bank:: Management meeting notes :BNP Paribas

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Management meeting notes 
ƒ IOB focusing on increasing loan and deposit market share
ƒ It expects lower credit costs on stronger recoveries
ƒ The bank expects to maintain NIM around 3% for FY12
ƒ IOB trades at 1x FY12E consensus ABV for FY12E ROE of 19%
We met the CMD of Indian Overseas
Bank (IOB), a mid-sized public sector
bank with over 2,200 branches and a loan
book of USD25b as of March 2011. We
present the key takeaways below.
Aiming for strong loan growth
IOB’s top management team under the
leadership of M Narendra, who joined as
CMD in November 2010, has been
focusing on improving asset quality and
driving strong loan growth backed by
increasing traction on CASA deposits.
1) IOB expects to track back strongly on the loan-book growth front. It
clocked credit growth of 41.6% for FY11 compared to 5.5% for FY10.
Management is guiding towards more than 25% growth for FY12. IOB’s
target over the next three years is to increase overall business (advances
+ deposits) to INR5,000b from INR2,570b for FY11 backed by increases
in branch and ATM count to 3,000 each and a CASA ratio of around 35%
(from 30% at present). The bank expects strong growth in its SME, midcorporate and education loan portfolio. A recent capital infusion of
USD235m by the Government of India has boosted its tier-1 ratio by
around 100bp. 2) The bank expects to maintain NIM around 3% for
FY12. IOB managed to improve NIM by 36bp y-y to 3.11% for FY11 by
shedding high-cost bulk deposits through FY10. 3) IOB expects noninterest income streams to also track strongly in-line with balance sheet
growth. Core fee income increased at 19% for FY11 compared to a 3%
decline in FY10. 4) On the opex front too, IOB expects the improving
trend to continue as it had been aggressively providing for pension
liabilities, and anticipates lower provisions going forward. IOB managed
to improve cost-income and cost-asset ratios to 47% and 1.7%
respectively for FY11, compared to 57% and 2% in FY10. Backed by all
this IOB is targeting a PAT of INR25b for FY12 compared to INR10.7b for
FY11.
Strong recoveries to lower credit costs, says IOB
Increased slippages, particularly in real estate and textile sectors
impacted IOB significantly in FY10, dragging GNPL to INR36b from
INR19b in FY09. However, IOB has seen the trend improve over the last
few quarters and expects credit costs to come down. Recoveries and
upgradation increased to INR17b for FY11, from INR12b each in FY09
and FY10. The restructured loan book has stayed flat over FY11
dropping to 6.2% of overall loan book from 8.9% in FY10. IOB is aiming
at reducing GNPL to INR20b for FY12, from INR31b in FY11.
Valuation

IOB currently trades at 1.0x FY12E ABV for FY12E ROE of 19%, based
on Bloomberg consensuses

Kotak Sec: Buy Indian Overseas Bank (IOB) - Perfect quarter on all fronts.

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Indian Overseas Bank (IOB)
Banks/Financial Institutions
Perfect quarter on all fronts. IOB had one of its best quarters ever with considerable
improvement witnessed over all fronts (1) margins expanded by 25 bps qoq to 3.25%
on the back of declining costs, (2) asset quality improved sharply on the back of lower
slippages (less than 1%) and higher recoveries, and (3) loan growth was higher than
industry at 14% qoq. IOB looks to have entered into a strong positive cycle of loan
growth and declining provisions resulting in higher earnings growth. Valuations at 0.8X
FY2012E PBR and 5X PER remain attractive for RoEs of 16%. BUY.

Buy Indian Overseas Bank – 3QFY2011 Result Update -Angel Broking

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 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.

Buy Indian Overseas Bank -Aggressive credit offtake propels profits… ICICI Sec

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Indian Overseas Bank -Aggressive credit offtake propels profits… 
IOB  quickened  its  pace  to  catch  up  on  lost  ground  in  Q3FY11  with
business mix crossing the | 225,000 crore target for January 2011, posting
21% YoY growth with C-D ratio high at 80%. Advances grew a strong
26% YoY (14% QoQ) to | 100129 crore while deposits increased 18% YoY
(6% QoQ) to | 125,062 crore. However, CASA declined QoQ from 33% to
31% as term deposits grew faster than demand deposits. NII surged 42%
YoY (18% QoQ) to | 1130 crore with NIM up 25 bps QoQ at 3.27%. Other
income rose 36% YoY to | 351 crore (recoveries from written off accounts
to the tune of  | 77 crore), abating its sluggish performance in past
quarters. Net profit grew a stellar 128% YoY (12% QoQ) to  | 232 crore
despite higher provisions. Asset quality improved with GNPA and NNPA
declining 2% and 16% QoQ to | 3264 crore and | 1488 crore, respectively.
We expect a 25% CAGR in business mix to boost NII and PAT by 29%
CAGR and 48% CAGR, respectively, over FY10-12E.

INDIAN OVERSEAS BANK -Beat on margins and slippages:: Edelweiss

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INDIAN OVERSEAS BANK
Beat on margins and slippages


Indian Overseas Bank (IOB) reported strong operating performance in Q3FY11,
buoyed by 25bps margin expansion and 16% Q-o-Q growth in advances. Key positive
surprise during the quarter was slippage run-rate sliding below 1% (that was running
as high as 3% on an average over the past six quarters) and gross NPLs coming off
to 3.26% (from 3.76% in Q2FY11). However, LLP continued to be higher as the bank
increased provisioning coverage by 5% points to 65% (on course to reach RBI
mandate of 70% by March 2011). PAT grew 12% Q-o-Q (more than double Y-o-Y),
led by 18% Q-o-Q growth in NII (42% Y-o-Y). The bank has been providing INR 360
mn per month towards retirement benefits, which is sufficient to take care of its
overall pension and gratuity liabilities.

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.

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.