CRISIL has assigned its ratings of ‘AA+/Stable’ to Indian Overseas Bank’s (IOB’s) Rs.7 billion upper Tier II and Rs.3 billion lower Tier II bond issues, and has reaffirmed its ratings on the bank’s other debt instruments at ‘AA+/Stable/P1’. The ratings continue to reflect IOB’s healthy earnings profile, comfortable resource and liquidity profiles, and adequate capitalisation levels. The ratings also factor in the expectation of support from its majority owner, the Government of India (GoI), in the event of distress. These strengths are, however, partially offset by the bank’s exposure to credits of modest asset quality, and its geographical concentration in South India.

IOB’s earnings profile is marked by a healthy net profitability margin (NPM) estimated at 1.8 per cent for 2007-08 (refers to financial year, April 1 to March 31), as against the industry average, estimated at 1.4 per cent. The bank’s return on assets is also high at 1.3 per cent for 2007-08. IOB’s profitability is expected to continue to remain above industry average over the medium term, given its high-yielding advances book and comfortable resource profile. The bank has an extensive branch network, moderate proportion of low-cost current and savings account deposits, a wide presence in rural and semi-urban areas, and access to the inter-bank call money market. However, IOB’s cost of borrowings (based on fortnightly average numbers) is estimated to have increased to 6.8 per cent in 2007-08 from 5.3 per cent in 2006-07. CRISIL believes that IOB’s sizeable branch net work and stable deposit base will help the bank maintain its comfortable resource and liquidity profiles over the near to medium term. IOB also derives significant strength from its majority owner, GoI, which has a moral obligation to support the bank in times of distress.

IOB’s capitalisation level is average with a Tier I capital adequacy ratio of 7.3 per cent (as per Basel II) as on March 31, 2008 (8.2 per cent – as per Basel I – on March 31, 2007). The bank’s net worth coverage of its net non-performing assets (NPAs) was strong at around 10 times as on June 30, 2008, while GoI’s holding at 61.23 per cent provides IOB the flexibility to raise additional equity capital. CRISIL believes that IOB’s capital adequacy levels will remain adequate over the medium term.

However, IOB’s asset quality is likely to be average as a major section of its clients are mid-sized corporates and traders. Moreover, the bank faces geographical concentration risk as about half of its branches, deposits, and advances are concentrated in South India.

Outlook:Stable
CRISIL believes that IOB will continue to benefit from GoI’s support. The bank’s healthy earnings, comfortable resource profile, and adequate capitalisation, will continue to provide stability to its standalone credit risk profile over the medium term. The outlook could be revised to ‘Positive’ if there is significant improvement in the bank’s capitalisation or asset quality levels. Conversely, deterioration in the bank’s earnings or resource profiles could cause the outlook to be revised to ‘Negative’.

About the bank:
IOB was established in 1937 by Mr. M M Chidambaram Chettiar, and nationalised in 1969. Headquartered in Chennai, IOB had a network of 1847 branches and 51 extension counters as on March 31, 2008. It also has six overseas branches, two in Hong Kong and one each in Singapore, South Korea, Sri Lanka, and Thailand. For the year ended March 31, 2008, IOB reported a profit after tax (PAT) of Rs.12 billion on a total income of Rs.34.9 billion (net of interest expense), as against a PAT and total income of Rs.10.1 billion and Rs.29.5 billion, respectively, for the previous year. For the quarter ended June 30, 2008, IOB reported a PAT of Rs.2.6 billion on a total income of Rs.7 billion (net of interest expense), as against a PAT and total income of Rs.2.7 billion and Rs.7.7 billion, respectively, in the corresponding period of the previous year.