>INDIAN OVERSEAS BANK: Result Update 1QFY2011

Indian Overseas Bank (IOB) posted net profit decline of 33.6% yoy and robust growth of 57.2% qoq to Rs200cr, above our estimates, because of better-than estimated NII growth and lower provisioning expenses. In-line operating performance along with signs of improvement in asset quality was the key highlight of the result. We recommend a Buy rating on the stock.

■ Initial signs of improvement in asset quality: At the end of 1QFY2011, advances were up by 7.9% yoy and by 2.7% qoq to Rs82,951cr. Deposits grew by 8.6% yoy but were down by 1.2% qoq at Rs1,09,461cr. NII grew 17.9% yoy and 10.5% qoq to Rs906cr. CASA deposits grew 22.9% yoy to Rs36,232cr at the end of 1QFY2011. Management is targeting advances and deposits growth of 22% and 20%, respectively, in FY2011E. For the quarter, gross NPAs were down by 1.1% qoq to Rs3,571cr, while net NPAs declined 10.1% qoq to Rs1,794cr. Gross and net NPA ratios improved to 4.3% (4.5% in 4QFY2010) and 2.2% (2.5% in 4QFY2010), respectively. The provision coverage ratio including technical write-offs was at 57.9%. Provision for NPAs declined 67.6% qoq to Rs154cr, leading to an 83.3% qoq decline in total provisions during the quarter. The bank’s CAR stood at 14.2%, with Tier-I capital of 8.3% (forming 58.5% of the total CAR).

■ Outlook and valuation: At the CMP, the stock is trading at attractive valuations of 0.82x FY2012E ABV of Rs140 (v/s a five-year range of 1.1x–1.4x and average of 1.3x) compared to the bank’s peers which are trading at 1.0x FY2012E ABV. IOB has a CASA ratio of 33.1%, one of the highest among its peers, which is especially favourable given the rising interest rate scenario. We have assigned a target multiple of 0.95x on FY2012E ABV, considering the potential improvement in asset quality, earnings and RoE going forward, along with IOB’s structurally strong deposit franchise relative to peers. Hence, we recommend a Buy rating on the stock with a Target Price of Rs133, indicating an upside potential of 15.3%.

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