Stock Market Result Update on Indian Overseas Bank for 2QFY2012

Stock Market Result Update on Indian Overseas Bank for 2QFY2012 with an Accumulate recommendation and a Target Price of `107 (12 months).

For 2QFY2012, Indian Overseas Bank (IOB) reported a weak performance with muted net profit growth of 0.6% yoy, well below our as well as street expectation, due to higher provisioning charges. Profit growth was also aided by a lower effective tax rate (23.3%). We maintain our Accumulate view on the stock.

Strong business growth; but slippages double sequentially: During 2QFY2012, business momentum for the bank was stronger than its peers, with sequential advances and deposits growth of 4.5% (up 44.2% yoy) and 8.2% (up 38.5% yoy), respectively. CASA deposits growth rate stood at 14.9% yoy, driven by 22.4% yoy growth in the more volatile current account deposits. Non-interest income growth was healthy at 55.6% yoy to `427cr, with growth coming from all sections. Cost of deposits for the bank increased by 40bp qoq to 7.2%. The qoq rise in yield on advances (45bp) to 10.9%, however, managed to fully offset the impact of cost of deposits, resulting in reported NIM remaining flat sequentially at 2.9%. The bank’s asset quality deteriorated significantly during 2QFY2012, with provisioning charges increasing by 108.6% to `636cr. For 2QFY2012, gross NPA ratio stood at 3.1% (2.8% in 1QFY2012) and net NPA ratio stood at 1.2% (1.1%) in 1QFY2012. Provision coverage ratio (including technical write-offs) weakened by ~173bp qoq to 71.8%.

Outlook and valuation: The bank had faced substantial asset-quality issues in FY2010 due to which RoEs were depressed to 11.5%. From this low base, we expect improvement in RoE to drive a 20.0% CAGR in earnings over FY2011-13E. However, we also remain wary of further incremental asset-quality pressures that could arise due to the bank’s aggressive lending to sensitive sectors over 2HFY2012. That said, at the CMP, the stock is trading at cheap valuations of 0.6x FY2013E P/ABV, which provides margin of safety in our view. Hence, we maintain our Accumulate rating on the stock with a target price of `107, valuing the stockat 0.7x FY2013E ABV.