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Indian Overseas Bank – Reduce

December 7, 2009

Kotak has downgraded Indian Overseas Bank (IOB) to REDUCE from ACCUMULATE earlier after its stock price has moved closer to target price. Although stock is currently quoting at 1.0x its FY11E adjusted book value its disappointing core performance and sharp deterioration in asset quality in last few quarters are likely be depress its valuation.

The bank’s net interest income (NII) was flat at Rs.7.85 bn in Q2FY10 on back of increase in balance sheet liquidity. Its net profit declined 51.0% to Rs.1.76 bn in Q2FY10 from Rs.3.59 bn in Q2FY09 on account of sharp increase in operating expenses (50.7%) and Rs.0.82 bn provisions done to absorb one third of excess liabilities over assets arising from the acquisition of Shree Suvarna Sahakari bank.

The bank has been witnessing moderation in its business activities in-line with the industry trends.

In Q1FY10 also, it increased 21.5% due to Rs.3.0 bn NPA addition on account of merger of Shree Suvarna Sahakari bank. The gross NPA increased to 3.42% at the end of Q2FY10 from 2.47% at the end of Q2FY09.

Expect net profit for FY10E and FY11E to be Rs.10.68 bn and 12.20 bn, respectively. This would result into an EPS of Rs.19.6 and Rs.22.4 for FY10E and FY11E, respectively.

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