Kotak Securities has recommended accumulate on Indian Overseas Bank with a target price of Rs 162.
In Q4, IOB delivered superior core earnings and NII grew at 48.1 per cent (YoY) on the back of strong loan growth (40.9% YoY) and 43 bps (YoY) improvements in NIM. However, net profit growth was even stronger (240.8% YoY) due to strong traction in non-interest income (36.4% YoY) and lower operating expenses (decline of 3.7% YoY) along with write-back of provisions.
Asset quality stabilized as both gross NPA and net NPA were on the downward trajectory, positive in our view. Gross NPA and net NPA now stand at 2.72% and 1.19%, respectively, at the end of Q4FY11. Its coverage ratio has reached to 70.5%, an improvement of 490 bps sequentially.
The bank has provided Rs 152 crore during FY11 towards second pension option liability for serving employees (1/5 of total liability to the tune of Rs 759 crore); left over amount of Rs.6.07 bn would be amortized over next four years. They have also fully provided for the retired employees (Rs.1.88 bn) as per the regulatory requirement. They are also amortizing gratuity liability over 5 years (Rs.493 mn each year; full liability is Rs.2.47 bn).
â€œWe have revised our earnings estimate upward for FY12E to take into account better core earnings and lower credit costs. We are also raising target price to Rs 162 (Rs 140 earlier) and maintain ACCUMULATE rating on the stock,â€ the brokerage said in a note.
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