IOB - Asset Quality concerns continue - Karvy

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.

Source : Equity Bulls

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