Indian Overseas Bank –Buy- Angel Securities

Indian Overseas Bank has announced its 1QFY2011 results, wherein it has registered net profit decline of 33.6% on a y-o-y basis and robust growth of 57.2% on a sequential basis to Rs200 crore, which is above our estimate on account of better-than-estimated NII growth coupled with lower provisioning expenses.

The bank made the entire FY2011 provision in respect of the acquisition of Suvarna Sahakari Bank during this quarter itself. In line with the operating performance, signs of improvement in asset quality were key highlights of the result. Advances were up by 7.9% yoy and by 2.7% on a sequential basis to Rs82,951 crore.

Deposits increased by 8.6% y-o-y but were down by 1.2% on a sequential basis at Rs1,09,461 crore. The credit-deposit ratio stood at 75.8% compared to 72.9% as of 4QFY2010. The CASA ratio increased to 33.1% as compared to 32.5% in 4QFY2010 and 29.2% in 1QFY2010. NII grew by 17.9% on a y-o-y basis and 10.5% on a sequential basis to Rs906cr. Non-interest income stood at Rs215cr, down by 6.8% yoy and 23.8% sequentially.

Operating costs increased by 15.2% y-o-y and 1.6% on a sequential basis. The cost-to-income ratio stood at 58.6%, higher than its eight-quarter average of 50.0%. Gross NPAs were down by 1.1% sequentially to Rs3,571 crore, while net NPAs were down by 10.1% sequentially to Rs1,794 crore compared to Rs1,995 crore in 4QFY2010. The bank’s gross and net NPA ratios improved to 4.3% and 2.2%, respectively.

The provision coverage ratio, including technical write-offs, was at 57.9%. The bank’s CAR was at 14.2%, with Tier-I CAR at 8.3%, as compared to 14.8% in 4QFY2010. While we were expecting an increase in recoveries, there were still some concerns regarding fresh slippages from the bank’s large restructured portfolio. However, looking at the broad improvement in asset quality, reflected in a sharp decline in NPA provisioning expenses and net NPAs, we are upgrading our FY2012E target P/ABV multiple for the bank to 0.95x. At the CMP, the stock is trading at valuations of 0.82x FY2012E ABV. Hence, we recommend a BUY on the stock with a target price of Rs132.

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