Indian Overseas Bank (IOB)

 

Growing Low-Cost CASA Deposits May Help IOB Attract Corporate Clients

 

THE stock of Indian Overseas Bank (IOB) gained 5.1% on Tuesday in a sluggish broader market. The benchmark Bombay Stock Exchange (BSE) Sensex rose by 1%. The bank's stock has consistently outperformed the index in the past one month.

   Though its stock price has gained momentum of late, the bank remains more or less a laggard in terms of financial performance. For instance, it grew its loan book by only 6.5% in FY10 compared to the 17% aggregate credit growth clocked by the banking industry.

   The bank also suffered due to a significant rise in non-performing assets (NPAs). Its net NPA comprised 2.5% of advances in FY10, compared to 1.3% a year earlier. Amidst all this, the bank has been able to maintain its net interest margin (NIM) at 2.8% during FY10. This sounds satisfactory, given that banks strive to keep their margins close to 3%.

   On the liability side, IOB has grown its deposits by 10.7% in FY10. Its low cost current and saving account deposits (CASA) comprised 33% of total deposits, which is in line with the industry average. But with the new base-rate norms, the bank may gain from even higher proportion of CASA in its deposits. This is because its base rate of 8.25% is substantially higher than that of the top public sector banks (between 7.5% and 7.75%). This may make IOB's lending rate less attractive for top companies.

   In such a scenario, a higher portion of CASA, which the bank can raise at a relatively lower cost, will help in reducing its base rate in the future.

   At a price-to-book value (P/BV) of 0.8, the bank is undervalued compared to its peers, which are trading at an average P/BV ratio of 1.1. The stock has gained handsomely in the past one month. The scrip has gained 15.4% since June 8 2010 against the 5.4% rise in the Sensex. This shows the renewed investor interest in the stock. Whether the stock retains its current streak will, however, be clear only after its upcoming June quarter results.