Indian Overseas Bank Q1 FY2025 Concall Summary

Key Takeaways

• Clean-up largely complete, growth now the story: Gross NPA ratio fell to 2.89% and net NPA to 0.51%, with a Provision Coverage Ratio of 96.96%, freeing management to focus on credit expansion and margin defense.
• Profitability strengthened on operating leverage: Net profit rose 26.47% YoY to ₹633 crores, driven by a 24.57% YoY jump in operating profit and a 520 bps reduction in the cost-to-income ratio.
• Credit growth is surging, deposit growth is chasing: Gross advances grew 20.30% YoY, far outpacing deposit growth of 12.97% YoY, pushing the CD ratio up 470 bps YoY to 77.04% and forcing need-based borrowings.
• NIMs are stable but face a cost-of-funds squeeze: Net Interest Margin held at 3.06%, with management targeting 3.10%, even as the cost of deposits rose to 4.95% due to competitive term-deposit pricing.
• What to watch next quarter: Whether the bank can sustain its guided 13-14% credit growth without further eroding margins or relying on bulk borrowings, and any concrete fallout from state-level farm loan waiver discussions.

Asset Quality: The Clean-up Dividend

• GNPA ratio nearly halved YoY: Gross NPAs fell from 7.13% to 2.89%, with an absolute reduction of ₹6,980 crores, driven by recoveries and tight slippage control.
• Net NPA now negligible: Net NPA ratio dropped to 0.51%, with absolute net NPAs at just ₹1,154 crores, giving the bank one of the cleanest slates in its peer set.
• Slippage engine is contained: Fresh slippages were only ₹277 crores for the quarter, with the slippage ratio improving from 0.31% YoY to 0.13%, a result of robust continuous monitoring.
• Recovery momentum is strong: Total recovery from NPAs was ₹582.27 crores, supplemented by ₹364.23 crores from technically written-off accounts, keeping credit cost low at 0.29%.
• Provision Coverage Ratio nears full coverage: PCR improved to 96.96%, meaning the balance sheet carries very little residual risk from legacy stressed assets.
• Restructured book is shrinking: Restructured accounts fell by 12.5% QoQ, removing another overhang on asset quality.

Credit Growth: RAM and Corporates Fire Together

• Retail, Agri, MSME all grew fast: Retail grew 16.69% YoY on home, vehicle, personal, and jewel loans; Agri surged 35.52% YoY; MSME grew 18.62% YoY, with medium enterprises up 74.81% on a low base and aggressive TReDS platform push.
• Corporate book is back, with guardrails: Corporate credit grew 15.82% YoY, but over 65% of the book is A-rated and above, with the rest largely state government entities, keeping risk weights in check.
• Capital-light strategy is working: Despite the advance growth, the credit risk-weighted asset to advances ratio fell to 53.91%, reflecting a deliberate tilt toward lower-risk exposures.
• Overseas credit is a modest contributor: Overseas advances grew only 5.89% YoY, suggesting the growth engine is overwhelmingly domestic.
• CD ratio is at the upper bound of comfort: The CD ratio rose to 77.04%, and management intends to hold it at 76-77%, implying deposit mobilization must now catch up to loan growth.

Deposits and Funding: The Margin Battle

• Deposit growth is lagging credit growth: Total deposits grew 12.97% YoY to ₹2,99,000 crores, well behind the 20.30% advance growth, forcing the bank into need-based borrowings.
• A single product is doing heavy lifting: The 444-day special retail term deposit at 7.30% has garnered around ₹40,000 crores over 18-19 months and remains stable, but it also pushed the cost of deposits up to 4.95%.
• CASA grew but the mix pressure is real: Absolute CASA rose 7.93% YoY to ₹1,26,000 crores, yet the rising cost of funds suggests the incremental deposit mix is tilting toward term deposits.
• Bulk deposits are a need-based tool, not a crutch: Management keeps bulk deposits at 6-7% of total deposits and uses them only when necessary, not as an aggressive growth lever.
• Borrowings increased to bridge the gap: Scarcity of deposits in the market and the need to meet credit demand and regulatory ratios led to higher borrowings, adding to interest expense pressure.

Srivastava: "We intend to maintain it at around 3.10%."

Profitability: Operating Leverage Kicks In

• Operating profit jumped on revenue growth and cost control: Operating profit rose 24.57% YoY to ₹1,676 crores, even as net interest income grew a more modest 5.08% YoY, showing the power of non-interest income and cost discipline.
• Cost-to-income ratio improved sharply: The ratio fell 520 bps YoY to 51.76%, a structural improvement that signals the franchise can grow revenue faster than expenses.
• Non-interest income was a tailwind, but lumpy: Non-interest income rose 28.52% YoY, driven by recoveries in written-off accounts, PSLC sales, and securities discount accretion; however, it dropped sharply QoQ from ₹943 crores to ₹160 crores because Q4 included a one-off MTO of ₹589 crores.
• Return ratios are recovering: Return on assets improved to 0.70% and return on equity to 14.10%, both YoY improvements that bring the bank closer to sustainable double-digit ROE.
• Tax expense rose on a technical factor: The increase came from a deferred tax asset reversal and ₹5 crores in overseas branch income tax, not from a higher effective tax rate on core earnings.
• Operating profit declined sequentially on a one-off: The ₹200-crore QoQ drop was tied to an open auction of around 91 NPA accounts late in Q1, a tactical move that depressed the quarter's number but supports future recoveries.

Capital and Contingent Liabilities

• Capital adequacy is comfortably above requirement: CAR stood at 17.82% against a regulatory minimum of 11.5%, giving ample headroom for the guided credit growth without near-term dilution risk.
• Contingent liabilities are large and unresolved: Disputed income tax liabilities stand at ₹8,450 crores and indirect tax at ₹1,146 crores. Management says such amounts exist across banks and that IOB may simply be more transparent in disclosure, but gave no timeline for resolution.

Srivastava: "Maybe we are trying to be more transparent as compared to other banks. That is what I can tell you."

Guidance & Commitments

Key Metrics