Indian Overseas Bank - 4QFY2012 Result Update - Angel Broking

Indian Overseas Bank (IOB) reported net profit growth of 21.8% yoy, mainly on account of a lower effective tax rate of 14.0% (due to tax write-back) and lower provisioning. Net profit came well ahead of our expectation, on account of lower provision coverage ratio and our anticipation of lower growth in operating income. We maintain our Buy view on the stock with a target price of Rs.101.

Strong business growth; but asset quality remain under pressure: During 4QFY2012, the banks' domestic business momentum was stronger than the system, with growth in advances and deposits coming at 23.6% and 22.7% yoy, respectively. CASA deposits growth rate stood at moderate 8.8% yoy, driven by 8.8% yoy growth in more volatile current deposits and subdued 4.1% yoy growth in Savings deposits. Non-interest income growth was healthy at 23.4% yoy to Rs.437cr, with growth coming from all sections. The cost of deposits for the bank went up by 18bp sequentially to 7.5%. The qoq rise in yield on funds (22bp to 10.0%), however, managed to fully offset the impact of increase in cost of funds (12bp qoq to 7.4%), resulting in sequential improvement in reported NIMs by 13bps to 2.7%. Though, the banks' gross NPA ratio declined to 2.7% from 3.0% in 3QFY2012, annualized slippage ratio stood at a high of 3.6%. Bank provisioning for NPA, standard assets and restructured assets decreased by 37.3% qoq (11.5% yoy) to Rs.355cr. The net NPA ratio for the bank stood at 1.35% (1.23% in 3QFY2012). PCR (incl. technical write-off) dipped by 402bp qoq to 67.7%. If the bank had maintained its PCR, the PBT would have lower by Rs.237cr (38.5%). In addition to this, the bank restructured loans amounting to Rs.3,170cr during the quarter, taking the outstanding restructured book to Rs.12,641cr (9.0% of total advances).

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 RoEs to improve to 13.9% in FY2014E, driven by 28.2% CAGR in earnings over FY2012-14E. However, we also remain wary of further incremental asset quality pressures that could arise due to bank's continued aggressive lending even in FY2012. At the CMP, the stock is trading at cheap valuations, in our view, of 0.5x FY2014E P/ABV. Hence, we recommend a Buy rating on the stock with a target price of Rs.101, valuing the stock at 0.6x FY2014E ABV.

Source : Equity Bulls

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