Indian Overseas Bank (NSE: IOB), a public bank, is the thirteenth-largest bank in India in terms of assets with an asset base of Rs. 1,210.73 billion and an extensive network of 1917 branches nationwide and six international branches. The bank has a higher concentration of its business and branches in southern India (45% of its its branch network), especially in its home state of Tamil Nadu. In the last five years, total assets of the bank have grown at a CAGR of 24.24% against the growth of 18.89% during 2008-09. In the same period net profit has grown 19.46%, aided by a fall in cost-income ratio (defined as operating expenses as percentage to the net income) from 46.40% in FY2008 to 41.90% in FY2009. Indian Overseas Bank is the only state-owned bank in India that has its own in-house core banking solution (CBS) which saves considerable costs. With the increasing competition among the banks, and in order to expand its market beyond southern parts of India, the Bank has been taking various inorganic routes by acquiring co-operative banks in western and northern parts of India. In March 2009, IOB received Board approval to take over a troubled Pune-based Shree Suvarna Sahakari Bank.
Due to the ongoing global financial turmoil, Indian Overseas Bank has kept aside Rs. 40 billion for restructuring spread across 9000 accounts as the bank has a strong presence in Export Lending and saw its Net Non-Performing Assets (NPAs) increasing to 1.33% in 2009 (highest among its peers like Union Bank of India and Syndicate Bank) from 0.60% in FY2008, as it saw stress in the industrial segment, real estate and agriculture loans. The bank has recovered well from the financial setbacks of 1990s to emerge as a strong bank with one of the highest Return on Assets (1.20% as of March 2009) and Return on Equity (24.80% as of March 31, 2009) in the Indian banking industry against peers' average of 1.10% and 22.04% respectively.
Indian Overseas Bank provides various banking services, including savings bank, current accounts, credit facilities and other services. The Bank’s services also include personal banking services, non-residential Indian (NRI) accounts, corporate banking services, foreign exchange reserves collections services, agri business consultancy and e-banking services. During fiscal 2010, IOB had 13 establishments abroad, consisting of six branches (two branches in Hong Kong and one each in Singapore, South Korea, Sri Lanka and Bangkok), four representative offices, two remittance centers and one extension counter. During fiscal 2009, the Bank launched a rural development project aiming at total village development called IOB-Sampoorna in Kuthambakkam and Padur villages in Tiruvallur District, Kameshwaram village in Nagapattinam District, Dhaliyur village in Coimbotore District and Innambur village in Thanjavur, Tamil Nadu.
As of March 2009, the bank had 1913 domestic and 6 foreign branches. Over 31% of its branches are located in rural areas where the bank has been leveraging its strong technology. The bank also has 531 ATMs, with a majority located in southern India. The Bank has exercised strong risk management which has made it possible to reduce its non-performing assets to 1.33% in FY2009 from 7.65% in FY2000. However, the Bank is finding it difficult to maintain its net profit margin with a growing balance sheet. Its NPM has fallen from 14.18% in 2005 to 11.80% in 2009.
Second Quarter 2010 Results
During the second quarter of 2010, Indian Overseas Bank's total business grew year-on-year from Rs. 177,670 crore to Rs. 192,412. The bank's total deposits grew from Rs. 100,806 crore to Rs. 109,461 crore. Gross advances increased from Rs. 76,864 crore to Rs. 82,951 crore. Total income at the end of the quarter was Rs. 2882.38 crore compared to Rs. 2808.51 crore at the end of the second quarter of 2009. Interest income was Rs. 2667.52 crore compared to Rs. 2577.85 in the year-ago period, and non interest income was Rs. 214.87 compared to Rs. 230.66 crore a year ago.
|Metric (in Billions INR)||2005||2006||2007||2008||2009|
|Total Interest Income||39.51||44.06||58.32||77.39||96.41|
|Non - Interest Income||6.40||5.41||3.89||10.37||15.96|
|Credit - Deposit Ratio||56.97%||68.78%||68.46%||72.41%||75.72%|
|Return on Average Assets (%)||1.30%||1.40%||1.40%||1.30%||1.20%|
Fiscal 2009 Results
In FY2009, Indian Overseas Bank earned Total Revenues of Rs. 112.37 billion, a 28.04% rise over FY2008 driven by strong growth in corporate business and non-interest income. During 2008-09, Non-Interest Income increased by 54% due to higher treasury gain and fee income. Total Revenues of the Bank have grown at a CAGR of 25.08% between FY05 to FY09. Total Interest income and Non-Interest income of the Bank have grown at a CAGR of 24.98% and 25.66% respectively in the period FY05-FY09. Loan growth outpaced deposit growth during the year and thus credit deposit ratio increased to 75.72% in FY2009 from 72.41% in FY2008.
In FY2009, Total Global Business of the Bank rose by 21.01% to Rs. 1,759.26 billion from Rs. 1,453.83 billion in FY2008 driven by 24.16% increase in Gross advances while deposits saw a moderate rise of 18.72%. During 2008-09, Net Interest Margin fell 16bps from 3% to 2.84% due to increase in cost of funds which was due to fall in current account and savings account (CASA) from 33.45% in FY2008 to 30.25% in FY2009. Also during the year, bank was able to reduce its bulk deposit as a percentage of total deposits to 14% from 19% in FY2008. In the last 5 years the Bank saw its NPA level at 1.33% for the first time largely due to its higher exposure to export and retail lending in the past one decade.
Indian Overseas Bank has registered a net profit of Rs. 13.26 billion for the year ended March 31, 2009, against Rs.12.02. billion in 2007-08. In the last 5 years, the same has grown by 19.46% every year. The Bank continued to maintain a sound capital base as indicated by its Capital Adequacy Ratio (CAR). As against the stipulated RBI norm of 9%, the Bank's CAR stood at 12.70%.
In FY2009, Corporate Banking revenue of the Bank increased by 81.16% to Rs. 44.87 billion from Rs. 24.77 billion recorded in FY2008. The Corporate Banking segment of the Bank comprises of advances to large and mid-corporates. The total lending to corporate sector stood at 45% of the Bank’s total Loan portfolio. During 2008-09, the Bank shifted its focus from retail lending to corporate lending as it comprises lesser risks to the Bank’s business. While operating Profit from corporate banking rose by 215% to Rs. 11.46 billion in FY2008 from Rs. 3.15 billion in FY2008.
It was a tough year for IOB in Retail lending. The Bank provides Mutual Fund, life insurance policies in addition to it’s core lending activities. For the first time in the last five years it registered negative growth of 10.25% in retail banking revenue over the last year. During the year the bank reduced its aggressive lending to this segment because due to financial downturn there is uncertainty in recovery of loan. It also took a significant hit in its operating profit which fell 52% to Rs. 7.66 billion in FY2009 from Rs. 15.84 billion in FY2008.
The Bank has an integrated Treasury, which covers both domestic and global markets and funds its balance sheet across locations. The Treasury proved to be one of the most profitable year for the Bank as operating profit from this segment rose 327% to Rs. Rs. 3.10 billion from Rs. 0.73 billion and revenue grew 20% y-o-y to Rs. 29.18 billion. Domestic Gross Investment stood at Rs. 304.97 billion as against Rs. 274.68 billion a year ago. The bank booked healthy profit on sale of investments of Rs. 6.37 billion as against Rs. 2.28 billion in FY2008. Income from Forex operations increased to Rs. 1.58 billion from Rs. 1.26 billion due to 37.45% increase in total foreign exchange turnover during the year.
The bank provides multiple services such as Merchant banking, Depository Services Loan Syndication, Total collection , Pension payment etc. Total revenue saw an increase of 121% to Rs. 4.47 billion from Rs. 2.02 billion a year ago. During 2008-09, the Bank earned Rs. 0.066 billion as syndication fees. Profit before Tax (PBT) from Other Operations rose 994% to Rs. 2.05 billion in FY2009 from Rs. 0.19 billion in FY2008.
|Indian Overseas Bank share holding pattern as of June 30, 2009 |
|Government of India||61.23%|
|Indian Financial Institutions||12.43%|
|Public and others||17.43%|
|Foreign Institutional Investors||8.92%|
Since 2004, there has been a wide difference in the business growth between the Private and PSU banks. In 2006, the business of Private Banks grew by 23% compared to a 19.10% growth for the same in the case of PSU Banks. This is largely due to a difference in lending aggressiveness (Retail loans account for 16% of the advances for PSUs compared to 60% in the case of ICICI Bank’s advances). This gap was high during FY04-06 as private banks like ICICI Bank and HDFC Bank aggressively sold retail loans like auto, home and personal loans. However, interest rates started rising from mid-FY 2006, which led to a slowdown in growth of private banks’ retail loan book. Moreover, PSU banks focus on lending to small and medium enterprises (SMEs), corporates and the priority sector. This resulted in over 30% growth in advances of Indian Bank, Corporation Bank and Bank of India (BoI) in FY09. Indian Overseas Bank's advances have grown at a CAGR of 31% from 2005-2009. Moreover, the Bank's corporate lending constitutes more than 45% of its total advances as of 31st March 2009.
Due to the global economic slowdown, the banking industry is experiencing slower loan growth, and the restructuring of loans is putting increased pressure on their profitability. In 2008-2009, 15 banks restructured their loans amounting to Rs. 400 billion. In the last five years, Indian Overseas Bank saw its NPA increasing (year-over-year) for the first time and this has increased from 0.60% in 2008 to 1.33% in 2009 largely due to its strong presence in export lending.It also restructured 9000 accounts worth Rs. 40 billion, signaling there may be some NPA increment in the future. The country’s largest lender, State Bank of India (SBI) restructured loans worth Rs 11,000 crores in the concluded fiscal. SBI’s restructuring is almost double the balance sheet size of the country’s mid-sized private sector bank- Development Credit Bank. In the case of Private players, ICICI Bank has restructured accounts worth Rs 1,115 crores, whereas HDFC Bank restructured 13 loan accounts amounting to Rs 120 crores in the last financial year. However, Axis Bank restructured accounts worth Rs 996 crores. YES Bank’s restructuring for the last fiscal was worth Rs 29 crore. This state of affairs is placing the Banks in a dismal phase as they are now shifting their focus from retail to corporate lending where the risk, as well as margin is low.
PSU Banks are excessively dependent on the interest income and constitues as much as 82-90% of their total income as compared to 40-50% (ICICI Bank) earned by Private players. This has increased competition pressure at the time when there is increased uncertainty in interest rate. Fee based income, a constituent of non interest income, of private sector banks grew at a CAGR of 45% between FY04 – FY08, outperforming its foreign and public sector peers whose fee based income grew at a CAGR of 35% and 18% respectively for the same period. With the increase in the competition, Over the last couple of years, fee based services have been an area of focus for PSU banks, which have looked to increase their presence in areas like investment banking and M&A deals, services.  In fact during the quarter ended 31 Dec, 2009, PSU Banks' Non-Interest Income have grown at 35.03% (y-o-y) compared to 22.69% (y-o-y) by private banks. Indian Overseas Bank, on its part has introduced a host of consumer friendly services like, bill pay, air and rail ticket booking, e-remittance, online share trading to name a few. Also, Keeping future growth in mind the bank has signed an agreement with Universal Sompo General Insurance Company of Japan for distributing products of the non-life insurer.
|Metrics/Company (figures in Billions INR)||Indian Overseas Bank||ICICI Bank||HDFC Bank||State Bank of India||Punjab National Bank||Bank of India||Bank of Baroda||Indian Bank||Canara Bank|
|Net Revenue (net of interest exp.)||34.87||161.83||75.11||264.2||75.32||85.51||59.62||30.60||58.46|
|Net Interest Income||24.50||73.04||52.3||170.21||55.34||54.99||39.11||20.54||35.38|
|Revenue Growth from 2007||71.50%||45.18%||50.70%||12.43%||8.49%||70.92%||20.21%||19.08%||5.50%|
|Net Profit Margin||13.70%||25.69%||21.17%||25.47%||20.46%||35.17%||24.07%||32.98%||26.77%|
|Total Operating Income||20.02||72.43||37.65||138.11||40.06||54.57||30.27||16.59||29.59|
|Other Key Industry Metrics|
|capital Adequacy Ratio||13.73%||14.92%||13.60%||13.47%||12.96%||12.95%||12.91%||12.74%||13.25%|
|Return on Assets||1.30%||1.10%||1.32%||1.01%||1.15%||1.25%||0.89%||1.64%||0.92%|