Sell Indian Overseas Bank; target of Rs 54: Dolat Capital

Dolat Capital is bearish on Indian Overseas Bank and has recommended sell rating on the stock with a target of Rs 54 in its October 26, 2012 research reports.

“Indian Overseas Bank’s (IOB) quarterly performance disappointed on all the counts. Dip in margin, subdued core fee income, sharp rise in gross slippages and lesser rate of NPL provisioning eroded the bank’s earning quality substantially NII was 6.7% below our estimates of ` 13.3bn and bottomline was 33% lower than our estimates of ` 2.4bn. The sharp rise in slippages was entirely unexpected and was the key reason was the wide deviation from our expectations. Should the bank had maintained its NPL provisioning rate, bottomline would have been much lesser. IOB’s tax rate could have lesser than 38% (as compared to 23% in Q2 FY12 and 28% in Q2 FY13) considering higher write-offs and lesser capital gains.”

“Considering weakness in core operation, unexpected rise in slippages, reduction in risk coverage and recent rise in provisioning for standard restructured loans, we reduce our earning estimates for FY13/FY14 by 46%/34% respectively. In absence of recent increase in provisioning requirements for standard restructured loan book, the bank’s earning estimates would be down by 33%/21% respectively. We reduce our target price by 35% to ` 54 (previous TP: ` 83) at 0.55x ABV FY14 and reduce stock rating to Sell.”

“In Q2 FY13, IOB’s NII drifted by 1.6% YoY to ` 12.5bn — 6.7% lesser than our estimates of ` 13.3bn. Margin fell by 26bps QoQ and 53bps YoY to 2.33%. Decrease in yield on credit book (48bps QoQ & 70bps YoY) and increase in deposit cost by 13bps QoQ and 51bps YoY. On volume front, C-D and incremental C-D ratios went up to 81% and 100% aiding in containing in erosion in margin. IOB showed major disappointment on asset quality front; gross slippages ratio went up sharply to 5.3% from 2.6% in Q1 FY13 and 3.7% in Q2 FY13. The bank’s gross NPAs rose 52% YoY and NNPA increased by 125% YoY; the bank’s NPL provisioning rate also came down denting coverage ratio to 43% from 51% (excl. technical write-offs). Majority of slippages took place in agriculture and service sectors. On industry-wise break-up, automobile, engineering, metals and textile industries witnessed relatively more slippages. Restructured loan book further rose to ` 148bn (9.6% of gross credit book). During the quarter, the bank added ` 16bn to restructured loan book. In H1 FY13, majority of restructuring took place in MFI, trade and real estate sectors,” says Dolat Capital research report.

Non-Institutions holding more than 90% in Indian cos

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