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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Limited downside
§ Upgrade to HOLD; we see limited downside from here
§ Signs of improving liquidity is another positive
§ Revise TP to INR460, which implies 1.45x FY12E adjusted BV
§ Trades at 1.26x our FY12E adjusted BV for ROE of 19%
Why we have upgraded now
We upgrade Bank of India (BOI) to HOLD (from Reduce), as we see limited
downside after the recent correction. We downgraded the stock on concerns about
tightening liquidity in the system (see our note, “Time to book profit”, dated 8
October 2010). We anticipate the liquidity conditions will return to more comfortable
levels over the next two-to-three months as deposit growth is increasing and
government spending will recycle government surplus into the system. We
believe BOI’s current valuations largely, price in the expected margin contraction
and a possible sector-specific spike in credit costs.
Changes to the sector and FY12 outlook
We downgraded BOI in October on concerns about a widening gap
between credit growth and deposit growth and, consequently, tight
liquidity in the system driving up funding costs. We have seen this thesis
play out so far, with the loan-to-deposit ratio (LDR) looking very stretched
for all major banks (see Exhibit 3 for BOI’s historical and incremental
LDR). Deposit rates have increased by 200-300bp across the sector and
deposit growth has inched up from 14% levels in October 2010 to 16.5%
in early January 2011. This deposit traction, together with the expected
increase in government spending over the next two to three months
should further ease the liquidity pressure in the system. In this context,
we are building in NIM contraction for FY12 and also increasing our loan-
loss provision (LLP) assumption to account for the possible increase in
credit cost. We calculate that BOI will have to disburse loans worth
INR115b in 4QFY11 to meet our loan growth estimate of 21% for FY11.
This represents q-q loan growth of 5.4% in 4QFY11. We assume an NIM
decline of 20bp over the next two to three quarters, in view of the
generally higher incidence of priority sector loans in 4Q (which should
drag down loan yields) and a further pass-through of higher funding
costs. We factor in LLP of 51bp in FY11 (113bp in FY10). For FY12, we
project loan growth of 24%, NIM of 2.7% and core-fee income growth of
24.5%. Our LLP estimate is 70bp for FY12.
Target price change and valuation
We reduce our target price for BOI to INR460.00 (from INR500.00),
implying a FY12E P/BV of 1.45x (earlier 1.5x). The stock trades at 1.26x
our FY12E adjusted BV for adjusted ROE of 19%. Our target price is
based on a three-stage residual income model, which assumes a risk
free rate of 8.3%, equity risk premium of 6%, terminal growth rate of 4%
and beta of 1.5. Key risks to our target price are: higher-than-expected
NIM compression and LLP.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Limited downside
§ Upgrade to HOLD; we see limited downside from here
§ Signs of improving liquidity is another positive
§ Revise TP to INR460, which implies 1.45x FY12E adjusted BV
§ Trades at 1.26x our FY12E adjusted BV for ROE of 19%
Why we have upgraded now
We upgrade Bank of India (BOI) to HOLD (from Reduce), as we see limited
downside after the recent correction. We downgraded the stock on concerns about
tightening liquidity in the system (see our note, “Time to book profit”, dated 8
October 2010). We anticipate the liquidity conditions will return to more comfortable
levels over the next two-to-three months as deposit growth is increasing and
government spending will recycle government surplus into the system. We
believe BOI’s current valuations largely, price in the expected margin contraction
and a possible sector-specific spike in credit costs.
Changes to the sector and FY12 outlook
We downgraded BOI in October on concerns about a widening gap
between credit growth and deposit growth and, consequently, tight
liquidity in the system driving up funding costs. We have seen this thesis
play out so far, with the loan-to-deposit ratio (LDR) looking very stretched
for all major banks (see Exhibit 3 for BOI’s historical and incremental
LDR). Deposit rates have increased by 200-300bp across the sector and
deposit growth has inched up from 14% levels in October 2010 to 16.5%
in early January 2011. This deposit traction, together with the expected
increase in government spending over the next two to three months
should further ease the liquidity pressure in the system. In this context,
we are building in NIM contraction for FY12 and also increasing our loan-
loss provision (LLP) assumption to account for the possible increase in
credit cost. We calculate that BOI will have to disburse loans worth
INR115b in 4QFY11 to meet our loan growth estimate of 21% for FY11.
This represents q-q loan growth of 5.4% in 4QFY11. We assume an NIM
decline of 20bp over the next two to three quarters, in view of the
generally higher incidence of priority sector loans in 4Q (which should
drag down loan yields) and a further pass-through of higher funding
costs. We factor in LLP of 51bp in FY11 (113bp in FY10). For FY12, we
project loan growth of 24%, NIM of 2.7% and core-fee income growth of
24.5%. Our LLP estimate is 70bp for FY12.
Target price change and valuation
We reduce our target price for BOI to INR460.00 (from INR500.00),
implying a FY12E P/BV of 1.45x (earlier 1.5x). The stock trades at 1.26x
our FY12E adjusted BV for adjusted ROE of 19%. Our target price is
based on a three-stage residual income model, which assumes a risk
free rate of 8.3%, equity risk premium of 6%, terminal growth rate of 4%
and beta of 1.5. Key risks to our target price are: higher-than-expected
NIM compression and LLP.
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