Macquarie Research:Meeting with IOB Management – Asset quality woes

Meeting with IOB Management – Asset quality woes

Event
􀂃 We met with Indian Overseas Bank’s management in Chennai.
Impact
􀂃 Asset quality pains not yet over: Management said that NPLs are likely to
rise in the near term due to slippage from restructured assets, the SME
portfolio as well as slippage from the agri-debt relief scheme. The bank is
likely to classify close to Rs1.6bn of agri loans as NPLs. These agri-loans
were a part of the agri-debt relief scheme.
􀂃 Deadline extension to meet the 70% coverage norm: IOB’s current NPL
coverage ratio is at 57% and the bank has an extension until March 2011 from
the RBI to meet the mandated 70% NPL coverage norm.
􀂃 CBS platform to recognise NPLs may see some increase: All state-owned
banks have received a notification from the finance ministry to migrate to the
online method of classification of NPLs compared with the current manual
method. The online system is likely to recognise more NPLs and the
management believes that most of them could be technical in nature.
􀂃 Not very sanguine on credit growth: Management believes that credit growth
for IOB could be sub 20% mainly due to corporates tapping debentures, CPs
etc for their credit needs, delay in drawdown of sanctioned limits due to project
delays and slower demand for capex. They have also hit their internal limits in
the power sector and are going slow on incremental disbursements.
􀂃 Margins likely to be maintained: Management sounded confident of
maintaining NIMs as they have close to Rs70-80bn of high cost deposits coming
up for re-pricing in the next two quarters. These were 720 day deposits launched
at an average interest of 10% which will now be re-priced at close to 8%, clearly
yielding re-pricing benefits and hence NIMs are likely to be maintained.
􀂃 Corporates moving to base rate after PLR hike: Management admitted that
its corporate credit department has seen a flurry of proposals to move towards
the base rate after PLR was hiked as the base rate system was giving roughly
a 25–50bps advantage in terms of pricing.
􀂃 Pension provisions likely to be bunched up in 3Q/4Q: The second option
of pensions was opened up in August 2010 and the employees as well as the
retirees have been given 60 days to opt for the second option.
􀂃 Retirement of GMs is a big issue: The large-scale retirement of GMs
(General Managers) in the next two years is a big issue. In many cases, the
DGMs are retiring along with the GMs or even before GMs, making the issue
even more complicated as AGMs can’t be directly promoted to GMs.
Outlook
􀂃 The stock is at 0.93x FY12E P/BV which represents a 20% discount to its
peers based on Bloomberg consensus estimates.