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Well placed for growth
In the next 3-5 years, if the economy grows at over 7% annually, system credit should grow sustainably at 18-20%.
Over the medium term, interest rates should generally decline, but NIM should remain stable. The bank is looking at 20-
25% loan growth in FY12. NIM is likely to contract from current levels given deposit rates are catching up with a lag.
About 30% of loans are linked to base rate, but the proportion is increasing quickly. The fixed rate portfolio is not more
than 5%. While PLR is close to the crisis peak levels, real interest rates are still lower. Bank believes borrowers have the
capacity to absorb a further hike of 50-75bps.
The bank has 73% provision cover on the book i.e. excluding write-offs, giving it a significant provision cushion to take care of
asset quality issues. New pension liability has been ascertained at INR20.69bn, implying INR4.14bn provision per year.
The bank thinks deregulation of savings rate is unlikely as it believes RBI can’t restrict banks on the lending side without
giving compensatory benefits on the asset side.
Basel-III would necessitate consolidation in the sector given the significant Tier-I CAR requirements.
Valuation and risks
BOB has historically traded at a premium to peers (ex-SBI). After underperforming the market by 25% since Nov-10 it
now trades at a marginal premium to peers, which we expect to sustain given its superior profitability.
The stock is currently trading at 6.3x FY12e PE and 1.4x FY12e PB. We expect it to rerate to 7.7x PE catalysed by
improving system liquidity after Apr-11. We value BOB using a weighted average combination of PE (75%), PB (15%),
and economic profit model (EPM, 10%). We set our 12-month target price at INR1,110. Downside risks: Worse than
expected slippages, economic slowdown.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Well placed for growth
In the next 3-5 years, if the economy grows at over 7% annually, system credit should grow sustainably at 18-20%.
Over the medium term, interest rates should generally decline, but NIM should remain stable. The bank is looking at 20-
25% loan growth in FY12. NIM is likely to contract from current levels given deposit rates are catching up with a lag.
About 30% of loans are linked to base rate, but the proportion is increasing quickly. The fixed rate portfolio is not more
than 5%. While PLR is close to the crisis peak levels, real interest rates are still lower. Bank believes borrowers have the
capacity to absorb a further hike of 50-75bps.
The bank has 73% provision cover on the book i.e. excluding write-offs, giving it a significant provision cushion to take care of
asset quality issues. New pension liability has been ascertained at INR20.69bn, implying INR4.14bn provision per year.
The bank thinks deregulation of savings rate is unlikely as it believes RBI can’t restrict banks on the lending side without
giving compensatory benefits on the asset side.
Basel-III would necessitate consolidation in the sector given the significant Tier-I CAR requirements.
Valuation and risks
BOB has historically traded at a premium to peers (ex-SBI). After underperforming the market by 25% since Nov-10 it
now trades at a marginal premium to peers, which we expect to sustain given its superior profitability.
The stock is currently trading at 6.3x FY12e PE and 1.4x FY12e PB. We expect it to rerate to 7.7x PE catalysed by
improving system liquidity after Apr-11. We value BOB using a weighted average combination of PE (75%), PB (15%),
and economic profit model (EPM, 10%). We set our 12-month target price at INR1,110. Downside risks: Worse than
expected slippages, economic slowdown.
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