Indian Overseas Bank - 1QFY2013 Result Update - Angel Broking

Indian Overseas Bank reported moderate net profit growth of 13.5% yoy to Rs.233cr during 1QFY2013. Despite subdued operating performance (operating profit growth of 5.5% yoy), earnings performance came on back of lower provisioning (decline of 4.5% yoy).

Strong business growth; but asset quality remains under pressure: During 1QFY2013, the banks' business momentum remained stronger than the system, with growth in advances and deposits coming at 24.5% and 22.3% yoy. CASA deposits growth rate stood at moderate 13.7% yoy, driven by 19.7% yoy growth in the current deposits and 12.0% yoy growth in Savings deposits. CASA ratio moderated to 25.6%. Sequentially, yield on funds dipped by 26bp to 9.8%. Cost of funds also declined by 4bp to 7.3%. Consequently, reported NIMs for the bank moderated by 15bp to 2.6%. Growth in non-interest income (excluding treasury) was moderate at 13.2% yoy on lower recoveries, though strong growth was reported in segments such as CEB and others. The bank's asset quality remained under pressure, with both gross and net NPA increasing sequentially by 23bp and 13bp, respectively to 3.0% and 1.5%, respectively. Slippages for the quarter (at Rs.865cr; annualised slippage rate of 2.5%) were lower sequentially, however remained elevated considering average of Rs.669cr since 1QFY2011. Major contribution to slippages came from sectors like agriculture, sugar, services excluding commercial real estate, infrastructure, textile, all engineering and other industries. PCR dipped by 57bp qoq to 67.1%. During 1QFY2013, the bank also restructured loans amounting to Rs.834cr, majorly from sectors such as power, airways, textile, auto and auto ancillary, micro finance and other industries, thereby taking its outstanding restructured book to Rs.13,368cr (~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 14.4% in FY2014, driven by 31.0% 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 over the last few quarters. Although, the stock is trading at valuations of 0.5x FY2014E P/ABV, in our view upsides are limited from these levels considering the overhang on asset quality as well as the relatively low tier-I capital adequacy. Hence, we recommend an Accumulate rating on the stock with a target price of Rs.84.

Source : Equity Bulls

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