Indian Overseas Bank 3QFY2014 performance highlights and results update
February 11, 2014, Tuesday, 06:03 GMT | 01:03 EST | 11:33 IST | 14:03 SGT
Indian Overseas Bank (IOB) reported a weak set of numbers for 3QFY2014, dragged by asset quality pressures. NII remained largely flat yoy (in spite of 10% yoy growth in advances, on back of interest reversals on slippages), while noninterest income expectedly de-grew by 11.9% yoy. Pre-provisioning profit de-grew 5.5% yoy, in-line with our expectations. On the asset quality front, absolute Gross and Net NPA levels increased sequentially by 12% each, already on a large base. Provisioning expenses for the bank remained flat yoy and as a result, PCR declined 275bp qoq to 57%. Overall, the bank reported an earnings de-growth of 36% yoy.
NIM declines 13bp qoq; Slippages remain elevated: During 3QFY2014, the bank’s advances continued to grow at a moderate pace, registering a growth of 10.5% yoy, largely aided by strong growth in Retail (57.3% yoy) and SME advances (31.8% yoy). While deposits grew at a healthy 15.0% yoy, growth in CASA deposits was relatively lower at 13.9% yoy. CASA ratio remained stable on a yoy basis. Higher cost of funds resulted in a 13bp qoq fall in Reported NIMs to 2.3%. The bank reported a weak non-interest income (excl. treasury) performance, registering a 7.5% yoy de-growth to Rs.421cr, on back of lower recoveries (more than halved) and yoy flat fee income performance. During the quarter, the bank witnessed continued asset quality deterioration, as annualized slippages ratio remained elevated at 4.1%. Recoveries/upgrades came in lower sequentially at Rs.342cr as compared to Rs.524cr in 2QFY2014. Absolute gross and net NPA levels for the bank increased sequentially by around 12% each, on an already large base. PCR for the bank declined 275bp qoq to 56.6%. The bank also restructured advances worth Rs.1,179cr during the quarter (as compared to Rs.1,330cr in the previous quarter). Going ahead, the Management targets sequentially lower slippages during 4QFY2014, while the restructuring pipeline under CDR stands sizable at Rs.2,000cr.
Outlook and valuation: Going ahead, we remain wary of incremental asset quality pressures for the bank, and the consequential provisioning expenses, as we take into account its aggressive lending over the last few years, high exposure to stressed sectors and an overall weak environment. Run rate of net NPAs accretion for the bank (quarterly average of Rs.550cr over the last six quarters) far outsizes its profitability (quarterly average of Rs.110cr over the same period). Moreover, subdued return ratios are likely to limit growth/require book-dilutive capital raising. Hence, we maintain our Neutral rating on the stock.