Chennai: Indian Overseas Bank (IOB) has reported a 21% increase in net profit in the fiscal’s first quarter ended June 2007, aided by higher business growth and investment income, although its profitability in lending declined in this period.
The Chennai-based bank reported a net profit of Rs269 crore or earnings per share of Rs19.71 in the three months ended June 2007, compared with Rs22 crore or earnings per share of Rs16.3 a year earlier.
Total income increased by 58% to Rs1,908 crore in the quarter ended June 2007, mainly on account of a 28% increase in advances and Rs106 crore increase in investment income (money from trading in securities or treasury operations as these are called).
“We expect to maintain high growth in credit in the current year,” said S.A. Bhat, chairman and managing director, IOB. “The lending would be focused more towards infrastructure and manufacturing sectors.” The bank’s capital adequacy ratio (CAR), the ratio of its capital to the weighted credit exposure, is at 13.31%.
The bank, following a direction from the Reserve Bank of India to avoid lending to high-risk sectors such as real estate and non-banking finance companies (NBFCs), is focusing on lending to the construction, power and manufacturing sectors in the current year. The growth in the real estate sector has remained flat at 2.8% in the three months to June 2007.
The increase in deposit rates has resulted in a fall in net interest margin (the difference between the interest rate charged on lending and interest rate paid on deposits) by 0.3% in the reporting quarter.
However, Bhat, who recently took over as chairman of the bank, said he expected deposit rates to come down after the announcement of the central bank’s credit policy by the end of this month, as there is excess liquidity in the banking system.
“If the deposit rates go down, there will be a lag in rate charged on advances to come down. This usually takes six months, which will help us maintain the current margin or improve it,” he said.
In a bid to reduce its cost of deposits, IOB is looking at replacing high-cost deposits with low-cost ones. It has set itself a target of one million new savings bank accounts, which is considered as low-cost deposit because of the low interest rate offered, in the current year that ends in March 2008.
As part of the expansion, IOB has chalked out plans to double its international business to $2 billion (Rs8,060 crore) over the next two years. Around 50% of the incremental $1 billion would be derived through existing operations, while the rest could be obtained as external commercial borrowing, he said.
IOB merged Bharat Overseas Bank with itself last year. The merger helped the bank to extend its overseas reach in terms of branches and assets. The bank, which recently received an approval from insurance sector regulator Irda, will roll out its first insurance product by December. Further approvals from Irda, for more products, are expected by September.