Indian Overseas Bank reported another strong quarter. Profit rose by more than half and bad loans fell to their lowest level in years. A sharp fall in the bank’s tax charge accounts for part of the jump, but core lending income also grew strongly.
Indian Overseas Bank, the Chennai-based public sector lender, reported standalone net profit of ₹1,912 crore for the September quarter, up 55.9% from ₹1,226 crore a year earlier and 15.3% higher than the June quarter. Consolidated profit was ₹1,963 crore. The shares rose more than 4% after the results.
For the first half, standalone profit rose about 53% to ₹3,572 crore.
What drove profits
The core business grew strongly. Net interest income, the main source of a bank’s earnings, rose 26.4% to ₹3,867 crore. Operating profit grew 25.7% to ₹3,016 crore, helped by tight cost control: operating expenses rose only 2.6% to ₹2,077 crore.
Tax made a large difference. Profit before tax rose 19.6% to ₹2,066 crore, much more slowly than net profit. The gap comes from a much lower tax charge of about ₹154 crore, compared with about ₹501 crore a year earlier.
The bank said it expects to be able to use its deferred tax assets, which are past losses it can set against future taxable profits. That lowers its tax bill for now, but the benefit will not last indefinitely.
Bad loans down
Asset quality improved again. Gross non-performing assets fell to 1.19% of loans from 1.83% a year earlier, continuing a steady decline from 3.10% two years ago. Net NPAs were only 0.16%. The provision coverage ratio, the share of bad loans already provided for, was 97.69%, meaning almost all problem loans are fully covered.
The improvement is especially notable for IOB. Ten years ago it was among the weakest public sector banks and spent several years under the RBI’s prompt corrective action framework, which restricts lending by banks with weak finances. Its recovery reflects years of cleaning up its balance sheet and recapitalisation by the government.
Sectoral trend
IOB’s results fit the pattern of public sector bank results this season. Bank of India reported a 25% profit increase last week, with gross NPAs at 1.60% and a return on equity above 16%. Across the sector, state-owned banks are reporting lower bad loans, falling provisions and higher returns.
The challenge for the rest of the year is margins and loan growth. The RBI’s rate hike this month should eventually let banks charge more on loans, but deposit costs are also rising as banks compete for funds. With high fuel prices and rising interest rates pressuring small businesses and retail borrowers, banks will need to keep bad loans from rising again.
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