>Indian Overseas Bank (ICICI DIRECT)

Disappointment on core income…
Indian Overseas Bank (IOB) reported Q4FY09 numbers, which were below our expectation on the NII front. The bank reported NII of Rs 704 crore, tepid growth of 3.2% YoY against our expectation of Rs 846 crore. The bottomline came in line at Rs 322 crore, registering a growth of 5.3% YoY, mainly due to 77% growth in non interest income to Rs 623 crore. Total business of the bank grew 21% YoY to Rs 175925 crore fuelled by deposit growth of 19% to Rs 100116 crore and advance growth of 24% to Rs 75810 crore. The asset quality of the bank deteriorated significantly during the year with GNPA of 2.5% and NNPA of 1.3%. CAR for the bank was
comfortable at 13.2% with Tier I capital of 7.9%.

Highlight of the quarter
Recoveries and treasury gains mainly contributed to non-interest income growth of 77% YoY. IOB reduced its BPLR by 75 bps in Q4FY09. So, yield on advances was expected to move southwards. This resulted in growth in interest income by 24% YoY to Rs 9641 crore. CASA slipped by 320 bps to 30.3%, which increased the interest expense by 28% YoY to Rs 6772 crore and resulted in NIMs contracting from over 3% in Q3FY09 to 2.6% for Q4FY09.

Valuations
At the current price of Rs 64, the stock is trading at 0.6x and 0.5x its FY10E and FY11E ABV, respectively. The bank has restructured assets worth Rs 4900 crore and has pending application of over Rs 3000 crore (together accounting for over 10% of loan book). This can impact the profitability, going ahead. Moderating business growth, deteriorating asset quality and rising pressure on NIMs will cap the upside for the stock. Thus, this warrants that we reduce the multiple assigned to the bank previously. We, therefore, value the stock at 0.65x FY10E ABV of Rs 114 and arrive at a target price of Rs 74. We rate the stock as PERFORMER.

To see full report: INDIAN OVERSEAS BANK