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Indian Overseas Bank 2QFY2013 performance highlights and results update

Contributed by Angel Broking

Indian Overseas Bank (IOB) reported a disappointing set of numbers with its net profit declining by 23.6% yoy to Rs.158cr. A lower NIM and significantly higher slippages were the major disappointments. We recommend a Neutral rating on the stock.

NIM lower on interest reversal; Slippages significantly higher for 2QFY2013: During 2QFY2013, the bankRs.s loan growth remained stronger than the system, with growth in advances coming in at 20.4% yoy. The growth in deposit was also reasonably healthy at 15.6% yoy. The CASA deposits growth rate stood at a moderate 5.3% yoy. While savings account deposits managed to increase by 10.2% yoy, the current account deposits declined by 9.5% yoy. The CASA ratio as of 2QFY2013 stood at 25.0%. During the quarter, the yield on advances came in lower by 48bp sequentially at 10.2%, primarily on account of interest rate reversals of Rs.168cr. Overall the reported NIM was lower by 26bp and stood at 2.3%. During 2QFY2013, the growth in non-interest income (excluding treasury) was muted at Rs.375cr. The fee income performance was weak as commissions, exchange and brokerage (CEB) income declined by 7.2% yoy to Rs.201cr. Slippages surprised negatively at Rs.1,854cr (5.3% annualised slippage ratio vs 2.5% in 1QFY2013), more than double the average slippage figures over the preceding six quarters. Some of the slippages were chunky in nature with 11 accounts contributing for around Rs.750cr worth of slippages. The PCR ratio dropped by 858bp during 2QFY2013 and now stands at a weak 58.5%.

Outlook and valuation: We remain wary of further incremental asset quality pressures and provisioning expenses that could arise due to bankRs.s continued aggressive lending over the last few quarters. Also, any further increase in provisioning expenses on standard restructuring advances (increased to 2.75% by the RBI) is expected to hit the bank materially owing to its high proportion of restructuring advances to overall loan book. Considering the overhang on asset quality as well as the relatively low tier-I capital adequacy, we recommend a Neutral rating on the stock.