Rising pile of non-performing assets coupled with low base of equity capital has cramped growth for state-owned Indian Overseas Bank. Not surprisingly, investors have been could-shouldering the stock for a while now. Over the last year, IOB shares shrank nearly 23% as against a rise of about 18% in the Bankex.
Rising pile of non-performing assets coupled with low base of equity capital has cramped growth for state-owned Indian Overseas Bank . Not surprisingly, investors have been could-shouldering the stock for a while now. Over the last year, IOB shares shrank nearly 23% as against a rise of about 18% in the Bankex, the broader index for banking stocks.
The bank however is optimistic of attaining recoveries (including upgradation) of Rs 2,000 crore by March-end as compared with Rs 1,100 crore recorded as on December 31, 2012.
"Our target is to take recoveries to 2000 crore by March end. We are purposefully moderating the credit growth. We are primarily intending to diversify the credit growth and keen on working capital loans mostly. We are not looking for large corporate lending now," M Narendra, chairman & managing director, IOB told moneycontrol.com in an interview.
Currently, the lender's tier - I capital stood at 7.33%, perhaps the second lowest in the industry after the Central Bank of India (at around 7%). It has just got an infusion of Rs 1,000 crore from the government, its major stake holder.
According to Narendra, after this capital injection its total capital adequacy ratio will be more than 12% versus 11.60% currently. In case of any further shortfall in capital, Life Insurance Corporate may pump in equity capital.
Here is an edited excerpt of the interview:
Q. Following RBI's policy rate cut, you only enhanced the loan limit from Rs 30 lakh to Rs 75 lakh. When will you reduce the base rate?
A. The timing of reduction of base will have to be examined. We will have a full discussion on that. Currently, we have given substantial other benefits to the productive segments. Even repo or CRR cut is meant to ensure that there will be enough support to productive sectors of the economy.
We will take a little more leverage in cutting our base rate when our cost of deposit gets reduced and bulk deposit rates are matured and later to be taken at a lower rate. By April 01, we will definitely look at that (cutting base rate). But until now, we will look at giving more benefits across the sectors.
Our bank is now offering home loans upto Rs 75 lakh at 10.50%. We are giving vehicle loans at 11%, loan against jewelry at 12% and SME credit at a maximum of 12%. The whole idea is that customers particularly from the priority sector are benefited.
Q. Your deposit growth has been muted (11% y-o-y) compared to your loan growth (19%). Do you have enough resources to sustain the credit growth?
A. Recently, we have raised USD 500 million from the overseas market. That will facilitate my lending in the international market.
As far as domestic market is concerned, we have enough sources of refinance. Then, we have excess statutory liquidity ratio (SLR) to the tune of 5-6% (total at 28-29%). Using that, we can borrow from RBI. We would like to utilize our current resources of deposits, CASA and all others to the fullest extent. We don’t have any short term liquidity mismatch.
We have moved our overall global credit deposit (CD) ratio to 84% from 81% earlier. That gives a leverage of good profitable deployment of funds. We are not unduly worried much.
Q. What net interest margin (NIM) are you aiming at?
A. We are purposefully reducing the share of bulk deposits. It is at 21% as against 34% in the previous quarter. We are planning to reduce it to 15%. This will help improve my net interest margin. We are very comfortable on liquidity front.
If I do not reduce my base rate, my NIM will move back to 2.65%. If I bring down my base rate by 25 bps, it will be around 2.58%.
Q. How would be the composition of your credit book going forward?
A. Today, we are not so aggressive on credit growth. We are purposefully moderating the credit growth. Our credit growth is a little better in the international market while the domestic credit is better than the industry average.
In October-December quarter, large corporate loans grew only 7.5% y-o-y. However, retail credit expanded 30% during the same time. We are primarily intending to diversify the credit growth and look for more working capital loans.
We are not looking for large corporate long term lending now. Under the present circumstances, the share of large corporates lending would be around 35%. However, it may change if there is any improvement in the economy.
Q. Do you see any uptick in infrastructure sector?
A. In the last one year, the road sector has seen a better growth. Compared to the power sector, the requirement in road sector is working capital mostly. It is not on term loan. A few projects have been currently given in the infrastructure road sector.
Q. On non-performing asset (NPA) front do you expect any ugly surprise?
A. There may be some cases for CDR referral. But, quite a lot of sectors are still in difficulty. They are not getting right time payments or infrastructure. There contracts are not getting materialized. This is mostly on mid corporate segment. Sector-wise problems have to be tackled individually.
We have enough internal limits for each sector that we lend. In fact, Infrastructure cap is around 12%. All other sectors are less than 3%. We are not surpassing any internal limit.
Q. What is the progress on recovery of bad loans?
A. So far in 2012-13, we have recovered (including upgradation) around 1100 crore. Our target is to reach Rs 2000 crore by March end. We are fully focused into it. During third quarter, we had Rs 119 crore cash recovery while 166 crore came from upgradation of loan accounts. Additionally, we recovered around 325 crore from the written off accounts.
Q. You got capital infusion of Rs 1000 crore. How are you placed to meet basel III capital requirement norms?
A. Your tier I requirement comes down under Basel III norms. Tier I in basel II is 8% while tier I in basel III is not more than 6.5%, even for RBI. To that extent, we are comfortable.
If there is any short fall, I will look to LIC for equity infusion. After this Rs 1000 crore infusion, capital adequacy ratio will be more than 12%. However, we have to see the cumulative plough back of profit. The government has also promised that they will give further capital as and when they are surplus.
Q. What is your expectation from Budget 2013?
A. There are quite a lot of suggestions. Our finance minister is serious in bring back the required reforms.
Firstly, we expect the government to allow banks going for long term bonds with a little tax break so that the future provision for infrastructure loans become better from our funding angle. Secondly, there should be lock-in period for deposits proposed for the tenure of 3-5 years in line with mutual fund industry. Thirdly, there are also proposals for tax benefits to banks for writing off loans. We look forward to all those.
Q. RBI issued draft guidelines on new restructuring norms. Your comments…
A. This is a very good sign so long as the economy and banks’ profitability permits. That’s why RBI has proposed for staggered provisions. Today, when such big restructuring cases are there, we should also have parallel provisions. In the event of any default, a bank will have lesser difficulty to manage.
At IOB, if you really upgrade the accounts, Rs 7000-8000 crore will be upgraded. Those have completed three years. Hence, the future liability increase on account of incremental provision will be reduced.
As and when normalcy comes to the economy, this special dispensation may have to be taken back.
IOB stock price
On October 23, 2014, Indian Overseas Bank closed at Rs 60.70, down Rs 0.05, or 0.08 percent. The 52-week high of the share was Rs 89.90 and the 52-week low was Rs 42.15.
The company's trailing 12-month (TTM) EPS was at Rs 6.05 per share as per the quarter ended June 2014. The stock's price-to-earnings (P/E) ratio was 10.03. The latest book value of the company is Rs 130.90 per share. At current value, the price-to-book value of the company is 0.46.
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