Indian Overseas Bank
One of the most consistent PSU bank
The company has one of the best return rations, besides good quality and consistent track record among the PSU banks
| Buy | Indian Overseas Bank |
| BSE Code | 532388 |
| NSE Code | IOB |
| Bloomberg | IOB@IN |
| Reuter | IOBK.BO |
| 52-week High/Low | Rs 229 / 87 |
| Current Price | Rs 186 (as on 11th January 2008) |
Chennai-based Indian Overseas Bank (IOB) is a public sector bank (government holding:61%) having dominant presence in southern India, which accounts for 45% of its branch network. Currently, the bank has a network of 1,781 branches spread across the country. It has a strong international presence in eight countries.
In Sept 2006, IOB bought the remaining stake of 70% in Bharat Overseas Bank (BhoB). This consolidation has augmented the IOB’s balance sheet by 6% to Rs 82,256 crore in FY07, along with the addition of 103 branches and one overseas branch in Bangkok, Thailand.
Consistence performance continues
For the second quarter ended September 2007, IOB recorded 41% increase in the Interest earned at Rs 1930.32 crore aided by 39% increase in Interest on advances at Rs 1305.89 crore. However the interest expenses for the period increased by 71% to Rs 1298.17 crore thus, restricting the growth of Net Interest Income by 3% to Rs 174.46 crore. Other income soared 81% to Rs 174.46 crore. Thus Net total income moved forward by 14% to Rs 806.61 crore.
Operating expenses, which include staff cost, was stagnant at 348.59 crore (against Rs 349.12 crore) further, lifting the Operating profit by 28% to Rs 458.03 crore. Provision and contingencies (including provision for NPA) for the period stood at Rs 8.32 crore compared to write back of Rs 1.45 crore. Finally the 17% increase in tax provision at Rs 130.01 crore saw net profit growing by 28% to Rs 319.70 crore.
For the six month quarter ended September 2007, IOB recorded 45% increase in the Interest earned at Rs 37763.52 crore. However interest expenses for the period also increased by 71% to Rs 2435.37 crore thus, restricting the growth of Net Interest Income by 13% to Rs 1341.15 crore. Other income soared 280% to Rs 236.05 crore. Thus Net total income moved forward by 26% to Rs 1577.20 crore.
Operating expenses, which include staff cost, grew 5% to Rs 710.00 crore further lifting the Operating profit by 52% to Rs 867.20 crore. Provision and contingencies (including provision for NPA) for the period stood at Rs 70.34 crore compared to write back of Rs 56.87 crore. Finally the 34% increase in tax provision at Rs 208.66 crore saw net profit growing by 25% to Rs 588.20 crore.
Total Business grew from Rs 98159.06 crore as on 30th Sept ‘06 to Rs 129628.48 crore as on 30th Sept ’07 recording a year on year growth of 32% and Total Deposits grew from Rs 57018.04 crore as on 30th Sept ’06 to Rs 78282.83 crore, up 37%.
Advances increased from Rs. 41141.02 cr as on 30th Sept ’06 to Rs 51345.65 cr as on 30th Sept ’07 achieving a growth of 24.80%.
Business Per Employee improved from Rs. 4.06 cr as at Sept ’06 to Rs 5.24 crore as at Sept ’07.
Net profit per employee has recorded improvement from Rs 3.90 lakhs in Sept ’06 to Rs 4.75 lakhs in Sept ’07.
Good other ratios
Capital Adequacy Ratio stood at 13.31%.
The bank is comfortably placed in terms of capital to support envisaged growth and can also increase capital if required at good premium through QIP route.
Higher non interest income to supplement core business
The bank’s other income has been growing at a steady pace with core fee income rising 23% in FY07 to Rs 388.2 crore.
For six month, its other income rose 280% to Rs 236.05 crore.
The bank has started selling gold also, which generates higher fee income. Recently, the bank entered into a joint venture with Sompo Japan Insurance Inc., Allahabad Bank, Karnataka Bank and Dabur Investment for starting non-life insurance business.
Focus on recoveries to boost profitability
Maintaining healthy asset quality is one of IOB’s top priorities. The bank has continuously shown improvement on this front where gross non-performing assets (GNPA) have declined from 5.51% (FY05) to 3.53% (FY06), and further to 2.38% (FY07). Net non-performing assets (NNPA)
also declined from 1.27% (FY05) to 0.65% (FY06), and to 0.55% (FY07).
Percentage of Gross and Net NPAs decreased to 2.10% and 0.35% respectively as at the end of Sept 2007 as against 2.96% and 0.57% as at the end of Sept 2006.
This improvement in asset quality is attributed to recoveries of around Rs 246 crore and Rs 442 crore in FY06 and FY07 respectively. Recoveries are expected to continue at a robust pace, thereby boosting profitability.
Highest return on equity in industry
In FY07, IOB had the best ROE at 28.1%, slightly higher than 27.2% in FY06. The bank is gearing its capital almost 19-20x, thereby producing super normal ROEs. Going forward, return ratios should remain attractive. Higher recoveries (Rs 440 crore in FY07), attractive NIM and lower cost-to-income ratio at 1.96% are the key drivers for the bank achieving higher return ratios.
Good performance to continue
IOB’s superior return ratios are a by-product of the healthy net interest margins (NIMs) that it has been able to command. The bank’s NIMs for the past three years have been above 3.5%, which is considered to be superior in the banking industry. The sustenance of healthy NIMs can be attributed to growing size of the business along with maintaining healthy yield on advances and relatively low cost of funds. NIM is expected to sustain at 3.48%-3.5% levels going forward.
IOB’s growth strategy hovers around strong growth in advances to industrial sector, SME sector and the retail side, thereby enabling it realise better yield on advances. Higher spread of branching network in rural and semi-urban areas has helped the bank garner good amount of retail deposits from these areas (more than 50% of the branches are located in rural and semi-urban areas).
Reasonable valuation
In FY 2008 we expect IOB to register EPS of Rs 23.5. This is expected to rise to Rs 29.9 in FY 2009. The share price trades at Rs 186. While P/E on FY 2008 EPS is just 7.9, it falls further to 6.2 on FY 2009 EPS. The bank has consistently grown its net profit at a CAGR of 25% for the past four years and once can expect it to increase the growth rate going forward. Moreover, its Price/ expected FY 09 Book Value ratio is also reasonable at 1.6 times.
| | 0603(12) | 0703(12) | 0803 (12P) | 0903 (12P) |
| Interest Earned | 4406.27 | 5832.07 | 7961.30 | 9951.62 |
| Interest Exp. | 2339.09 | 3271.27 | 5019.36 | 6525.17 |
| Net Interest Income | 2067.18 | 2560.80 | 2941.93 | 3426.45 |
| Other Inc. | 541.12 | 387.05 | 609.64 | 762.05 |
| Net Total Inc. | 2608.30 | 2947.85 | 3551.57 | 4188.50 |
| Operating Expenses | 1261.56 | 1387.81 | 1453.95 | 1570.26 |
| Operating Profits | 1346.74 | 1560.04 | 2097.63 | 2618.24 |
| Provisions & Cont. | 361.11 | 186.60 | 338.16 | 371.97 |
| Profit Before Tax | 985.63 | 1373.44 | 1759.47 | 2246.26 |
| Current Tax | 202.29 | 365.00 | 478.19 | 617.72 |
| Net Profit | 783.34 | 1008.44 | 1281.28 | 1628.54 |
| EPS*(Rs) | 14.4 | 18.5 | 23.5 | 29.9 |
| * Annualised on current equity of Rs 544.80 crore. | ||||
| Indian Overseas Bank: Results |
| | 0706(3) | 0606(3) | Var. (%) | 0706(3) | 0606(3) | Var. (%) | 0703(12) | 0603(12) | Var. (%) |
| Interest Earned | 1930.32 | 1372.13 | 41 | 3776.52 | 2613.01 | 45 | 5832.07 | 4406.27 | 32 |
| Interest Exp. | 1298.17 | 760.21 | 71 | 2435.37 | 1425.56 | 71 | 3271.27 | 2339.09 | 40 |
| Net Interest Income | 632.15 | 611.92 | 3 | 1341.15 | 1187.45 | 13 | 2560.80 | 2067.18 | 24 |
| Other Inc. | 174.46 | 96.40 | 81 | 236.05 | 62.19 | 280 | 387.05 | 541.12 | -28 |
| Net Total Inc. | 806.61 | 708.32 | 14 | 1577.20 | 1249.64 | 26 | 2947.85 | 2608.30 | 13 |
| Operating Expenses | 348.58 | 349.12 | 0 | 710.00 | 679.29 | 5 | 1387.81 | 1261.56 | 10 |
| Operating Profits | 458.03 | 359.20 | 28 | 867.20 | 570.35 | 52 | 1560.04 | 1346.74 | 16 |
| Provisions & Cont. | 8.32 | -1.45 | PL | 70.34 | -56.87 | PL | 186.60 | 361.11 | -48 |
| Profit Before Tax | 449.71 | 360.65 | 25 | 796.86 | 627.22 | 27 | 1373.44 | 985.63 | 39 |
| Current Tax | 130.01 | 110.81 | 17 | 208.66 | 155.33 | 34 | 365.00 | 202.29 | 80 |
| Net Profit | 319.70 | 249.84 | 28 | 588.20 | 471.89 | 25 | 1008.44 | 783.34 | 29 |
| EPS*(Rs) | 23.5 | 18.3 | | 21.6 | 17.3 | | 18.5 | 14.4 | |
| * Annualised on current equity of Rs 544.80 crore. | |||||||||
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