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Indian Overseas Bank
Indian Overseas Bank
August 1, 2011
ACCUMULATE
CMP Target Price `137 `155
12 Months
1QFY11 906 464 200 % chg (yoy) 31.0 73.0 2.6
Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code
For 1QFY2012, Indian Overseas Bank (IOB) reported a weak set of results, registering muted growth of 2.6% yoy in its net profit to `206cr, considerably below our as well as streets estimates. Even muted profit growth was aided by a favourable base (as the bank had charged of `82cr towards exceptional items in 1QFY2011). We maintain our Accumulate view on the stock. Strong business growth; but with higher slippages and NIM compression: During 1QFY2012, the banks business growth continued to be healthy, with advances growing by healthy 6.5% qoq (up 43.6% yoy) and deposits increasing by 4.1% qoq (up 38.1% yoy). The banks profitability in 1QFY2012 was also aided by lower tax rate (20.2% vs. 27% in 1QFY2011) due to write-back of `100cr of excess provisions and the bank not charging off ~`21cr towards amortisation of the merger deficit. CASA ratio dipped by 264bp qoq to 27.6%. The reducing share of CASA deposits and the higher interest rate environment resulted in a sharp 78bp rise in cost of deposits, which was not fully compensated by the 61bp qoq increase in yield on advances, resulting in NIM compression of 31bp qoq to 2.9%. Fee income rose by healthy 29.9% yoy and recoveries picked up strongly. Slippages ratio for the quarter moderated from the high 4.3% of 4QFY2011 but remained relatively high at 1.7%. The bank is yet to migrate accounts below `50lakhs (~20% of loan book) to system-based NPA recognition platform, which is likely to keep slippages high in 2QFY2012 as well. Provision coverage ratio (including technical write-offs) improved to 73.5% during the quarter. Outlook and valuation: We maintain our positive view on the stock, considering the improvement in RoEs expected going forward. However, a flagging asset quality remains the biggest risk to the banks ability to deliver sustained performance in the future. At the CMP, the stock is trading at moderate valuations, in our view, of 0.84x FY2013E P/ABV. We maintain our Accumulate rating on the stock with a target price of `155, valuing the stock at 0.95x FY2013E ABV. Key financials
Y/E March (` cr) NII % chg Net profit % chg NIM (%) EPS (`) P/E (x) P/ABV (x) RoA (%) RoE (%)
Source: Company, Angel Research
Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 65.9 13.5 6.8 13.8
3m
(4.3) (10.0)
1yr
2.5 20.0
3yr
27.6 62.6
FY2010 3,114 8.5 707 (46.7) 2.6 13.0 10.6 1.4 0.6 11.5
FY2011 4,208 35.1 1,073 51.7 2.8 17.3 7.9 1.1 0.7 14.8
FY2012E 4,912 16.7 1,299 21.1 2.5 21.0 6.5 1.0 0.6 15.0
FY2013E 5,515 12.3 1,608 23.8 2.4 26.0 5.3 0.8 0.7 16.4
Vaibhav Agrawal
022 3935 7800 Ext: 6808 vaibhav.agrawal@angelbroking.com
Shrinivas Bhutda
022 3935 7800 Ext: 6845 shrinivas.bhutda@angelbroking.com
Varun Varma
022 3935 7800 Ext: 6847 varun.varma@angelbroking.com
1QFY12 4QFY11 % chg (qoq) 1QFY11 % chg (yoy) 3,993 3,009 893 90 2,805 1,188 339 354 178 (15) 100 77 1,527 724 502 222 803 545 436 53 56 258 52 206 20.2 3,532 2,616 823 68 25 2,317 1,215 384 354 228 30 46 80 1,600 623 363 260 977 446 305 42 100 531 97 434 18.2 13.0 15.0 8.5 33.5 (100.0) 21.1 (2.3) (11.8) 0.1 (21.8) (150.1) 116.3 (4.6) (4.6) 16.3 38.5 (14.7) (17.8) 22.2 42.9 28.1 (43.6) (51.5) (46.1) (52.7) 201bp 2,668 1,944 668 56 1,761 906 215 227 137 (12) 27 63 1,121 657 474 183 464 77 154 (98) 21 387 82 104 200 27.0 49.7 54.8 33.8 61.7 59.3 31.0 57.9 56.1 29.9 24.5 269.9 21.7 36.2 10.2 5.9 21.4 73.0 609.2 183.5 (154.7) 170.8 (33.4) (100.0) (50.1) 2.6 (678)bp
Estimates 1,276 329 1,605 644 961 526 435 141 294
Variation (%) (6.9) 3.1 (4.9) 12.4 (16.5) 3.6 (40.8) (63.1) (30.0)
August 1, 2011
1QFY12
4QFY11
% chg (qoq) 6.5 181bp (22.3) 1.3 (5.0) (264)bp (117)bp (64)bp 78bp 61bp 5bp 39bp 69bp (31)bp 850bp 6.5 4bp (5.3) (11)bp 305bp (259)bp 23bp
1QFY11 % chg (yoy) 82,951 75.8 7,427 28,830 36,256 33.1 14.2 8.3 5.6 9.7 7.1 8.7 5.8 2.9 58.6 3,571 4.3 1,794 2.2 57.9 1.8 0.4 43.6 38.1 303bp 23.6 12.7 14.9 (556)bp (81)bp (74)bp 113bp 76bp 20bp 92bp 103bp (9)bp (1119)bp (7.8) (154)bp (29.9) (113)bp 1565bp (2)bp 57bp
119,148 111,833 151,173 145,229 78.8 9,179 32,488 41,666 27.6 13.4 7.5 6.8 10.5 7.3 9.6 6.8 2.9 47.4 3,292 2.8 1,258 1.1 73.5 1.7 1.0 77.0 11,806 32,056 43,861 30.2 14.6 8.2 6.0 9.9 7.2 9.2 6.1 3.2 38.9 3,090 2.7 1,328 1.2 70.5 4.3 0.7
4.1 109,461
15.9 5.9
2.7
4.1 7.9
6.5 4.1
5.0 (5.0)
11.7 16.1
70.0 65.0
10.0
33.1
33.1
31.0
30.2
(1.2)
60.0
27.6
7.0
6.00
5.64
5.76
5.00
1QFY12 4QFY11 178 (15) 100 77 339 354 228 30 46 80 385 354
% chg (qoq) 1QFY11 (21.8) 116.3 (4.6) (11.8) 0.1 137 (12) 27 63 215 227
August 1, 2011
system-based NPA recognition platform, which could result in substantially higher slippages in 2QFY2012, as has been witnessed in case of other banks. However, management is hopeful of strong recoveries (guidance of ~`250cr for 2QFY2012) to partly offset the expected rise in slippages. Recoveries from gross NPAs declined considerably to `102cr, as compared to `361cr in 1QFY2011 and `381cr in 4QFY2011. The provision coverage ratio (including technical write offs) improved to 73.5% from 70.5% in 4QFY2011. The banks exposure to the power sector stood at ~7% of the loan book, while exposure to state electricity boards (SEBs) stood at ~`4,800cr (~4% of advances). The bank made provisions for NPA amounting to `395cr during the quarter (`305cr in 4QFY2011). Of the NPA provisions, `145cr was required towards the recent hike in regulatory provisioning requirements. In addition, the bank provided `41cr towards the counter-cyclical provisioning buffer as mandated by the RBI. The bank will have to provide an additional sum of `290cr towards the buffer during the remaining three quarters of FY2012.
1.8
3.8
0.9
4.3
1.7
4.3 2.2
3.8 2.0
3.3 1.5
2.7 1.2
2.8 1.1
40.0
0.9
Investment arguments
Pace in business, but with its share of pain
The pace of business growth picked up in 2HFY2011 and even continued in the usually lean first quarter (1QFY2012). Going by managements indication, growth momentum is likely to continue in FY2012 as well. The double-digit sequential growth witnessed in advances as well as deposits in 4QFY2011 was marred by high slippages. Even in 1QFY2012, though slippages rate moderated, it remained relatively high at 1.7%. Slippage ratio for the entire FY2011 stood at 2.7%. Based on the rate at which the bank is looking to grow, we expect similar levels of slippages in FY2012 (2.6%) and FY2013 (2.4%). The migration of accounts below `50lakhs (~20% of loan book) to system-based NPA recognition platform is also expected to keep slippages high.
Earlier estimates FY2012 20.0 23.0 27.7 2.7 14.3 2.5 15.0 2.6 0.1 FY2013 17.0 17.0 26.3 2.4 14.7 15.0 15.0 2.4 0.1
Revised estimates FY2012 22.0 24.0 27.5 2.5 12.1 15.0 15.0 2.6 0.1 FY2013 17.0 18.0 25.9 2.4 19.9 15.0 15.0 2.4 0.1
August 1, 2011
FY2013 Earlier estimates 5,426 1,605 7,031 3,152 3,879 1,458 2,421 786 1,636 Revised Var. (%) estimates 5,515 1,647 7,161 3,402 3,759 1,379 2,380 772 1,608 1.6 2.6 1.9 7.9 (3.1) (5.4) (1.7) (1.7) (1.7)
Earlier estimates 5,096 1,400 6,496 2,741 3,755 1,697 2,058 668 1,391
Revised Var. (%) estimates 4,912 1,373 6,285 2,958 3,326 1,523 1,804 505 1,299 (3.6) (1.9) (3.2) 7.9 (11.4) (10.3) (12.4) (24.4) (6.6)
Oct-09
Nov-06
May-10
Aug-08
Dec-10
August 1, 2011
Mar-09
Feb-12
Jun-07
Apr-06
Jan-08
Jul-11
FY2011-13E EPS CAGR (%) 20.9 20.2 30.5 25.8 11.6 19.1 9.2 3.1 10.8 18.7 (2.4) (10.9) 6.1 5.1 14.3 10.4 22.4 8.8 7.5 7.4 44.2 14.6 16.5 20.0 6.1 8.6
FY2013E RoA (%) 1.5 1.3 1.7 1.5 0.9 1.2 0.9 1.0 1.1 0.8 0.9 0.5 0.9 0.8 0.7 1.4 0.7 1.2 0.9 1.0 1.1 0.7 0.6 0.8 0.5 0.5
FY2013E RoE (%) 21.0 14.1 20.9 16.0 17.2 20.6 17.8 16.8 19.6 18.0 17.2 15.1 17.9 15.7 14.5 20.4 16.4 17.0 14.4 20.0 22.6 17.0 17.1 17.9 12.5 12.8
Source: Company, Angel Research; Note:*Target multiples=SOTP Target Price/ABV (including subsidiaries), Without adjusting for SASF
August 1, 2011
Income statement
Y/E March (` cr) Net Interest Income - YoY Growth (%) Other Income - YoY Growth (%) Operating Income - YoY Growth (%) Operating Expenses - YoY Growth (%) Pre - Provision Profit - YoY Growth (%) Prov. & Cont. - YoY Growth (%) Profit Before Tax - YoY Growth (%) Prov. for Taxation - as a % of PBT PAT - YoY Growth (%) FY08 2,679 4.6 1,075 24.7 3,755 9.7 1,485 7.0 2,270 11.5 615 (7.2) 1,655 20.5 452 27.3 1,202 19.2 FY09 2,870 7.1 1,713 59.3 4,583 22.0 1,942 30.7 2,641 16.4 687 11.7 1,954 18.1 629 32.2 1,326 10.3 FY10 3,114 8.5 1,197 (30.2) 4,311 (5.9) 2,466 27.0 1,845 (30.2) 866 26.1 979 (49.9) 272 27.8 707 (46.7) FY11 4,208 35.1 1,225 2.4 5,433 26.0 2,573 4.3 2,861 55.1 1,268 46.5 1,592 62.7 520 32.6 1,073 51.7 FY12E 4,912 16.7 1,373 12.1 6,285 15.7 2,958 15.0 3,326 16.3 1,523 20.0 1,804 13.3 505 28.0 1,299 21.1 FY13E 5,515 12.3 1,647 19.9 7,161 13.9 3,402 15.0 3,759 13.0 1,379 (9.4) 2,380 31.9 772 32.4 1,608 23.8
Balance sheet
Y/E March (` cr) Share Capital Reserves & Surplus Deposits - Growth (%) Borrowings Tier 2 Capital Other Liab. & Prov. Total Liabilities Cash Balances Bank Balances Investments Advances - Growth (%) Fixed Assets Other Assets Total Assets - Growth (%) FY08 545 4,312 22.7 6,354 2,837 3,487 9,124 1,217 28,475 60,424 28.4 559 2,061 23.8 FY09 545 6,606 18.7 6,548 3,946 3,312 5,940 4,981 31,215 74,885 23.9 1,710 2,341 18.9 FY10 545 6,980 110,795 10.7 4,111 4,871 3,795 131,097 7,666 2,158 37,651 79,004 5.5 1,700 2,918 131,097 8.3 FY11 619 8,706 145,229 31.1 12,517 6,838 4,875 178,784 10,011 2,008 48,610 111,833 41.6 1,681 4,641 178,784 36.4 FY12E 619 9,717 180,084 24.0 15,474 8,343 6,776 221,012 11,705 4,420 60,697 136,436 22.0 2,016 5,737 221,012 23.6 FY13E 619 10,965 212,499 18.0 18,203 9,761 7,950 259,997 13,812 5,200 72,304 159,630 17.0 2,300 6,749 259,997 17.6
84,326 100,116
101,860 121,073
101,860 121,073
August 1, 2011
Ratio analysis
Y/E March Profitability ratios (%) NIMs Cost to Income Ratio RoA RoE B/S ratios (%) CASA Ratio Credit/Deposit Ratio CAR - Tier I Asset Quality (%) Gross NPAs Net NPAs Slippages Loan Loss Prov./Avg. Assets Provision Coverage Per Share Data (`) EPS ABVPS DPS Valuation Ratios PER (x) P/ABVPS (x) Dividend Yield DuPont Analysis (%) NII (-) Prov. Exp. Adj. NII Treasury Int. Sens. Inc. Other Inc. Op. Inc. Opex PBT Taxes RoA Leverage (x) RoE 2.9 0.7 2.2 0.2 2.5 0.9 3.4 1.6 1.8 0.5 1.3 21.4 27.9 2.6 0.6 2.0 0.6 2.5 1.0 3.5 1.7 1.8 0.6 1.2 20.9 24.8 2.5 0.7 1.8 0.2 2.0 0.7 2.7 2.0 0.8 0.2 0.6 20.5 11.5 2.7 0.8 1.9 0.1 2.0 0.7 2.7 1.7 1.0 0.3 0.7 21.4 14.8 2.5 0.8 1.7 (0.0) 1.7 0.7 2.4 1.5 0.9 0.3 0.6 23.1 15.0 2.3 0.6 1.7 0.0 1.8 0.7 2.4 1.4 1.0 0.3 0.7 24.5 16.4 6.2 1.6 2.3 5.6 1.4 3.3 10.6 1.4 2.6 7.9 1.1 3.6 6.5 1.0 2.9 5.3 0.8 3.6 22.1 85.0 3.2 24.3 99.5 4.5 13.0 96.5 3.5 17.3 123.0 5.0 21.0 144.1 4.0 26.0 163.2 5.0 1.6 0.6 1.4 0.1 63.6 2.5 1.3 3.7 0.3 48.0 4.5 2.5 4.1 0.7 54.0 2.7 1.2 2.7 0.7 70.5 3.5 1.4 2.6 0.6 71.0 4.1 1.5 2.4 0.5 71.0 33.5 71.7 12.0 7.9 30.3 74.8 11.8 7.0 32.5 71.3 13.6 8.0 30.2 77.0 13.5 7.6 27.5 75.8 14.0 7.6 25.9 75.1 13.7 7.2 3.0 39.6 1.3 27.9 2.7 42.4 1.2 24.8 2.6 57.2 0.6 11.5 2.8 47.3 0.7 14.8 2.5 47.1 0.6 15.0 2.4 47.5 0.7 16.4 FY08 FY09 FY10 FY11 FY12E FY13E
August 1, 2011
10
E-mail: research@angelbroking.com
Website: www.angelbroking.com
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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors
Ratings (Returns):
August 1, 2011
11