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Investment Thesis
• Between September 2009 and
September 2010 – BOI’s credit costs
were higher and its margin expansion
was weaker than peers. Both trends
have seen material improvement.
• We believe that a part of the asset
quality pressure stemmed from
front-loading by the new management.
• Valuations are attractive – BOI is
trading at 7.5x F2012e earnings, 1.2x
BV and 4.3x core PPOP.
• As the bank continues to deliver on
improving revenues and asset quality
– it could see more outperformance.
Key Value Drivers
• Margin progression.
• Trend in loan growth.
• Fee income growth.
• Credit costs.
• Operating costs.
Potential Catalysts
• New NPL formation in F2012.
• Margin trends.
• Trend in system-wide loan growth.
• Fee income progression.
Key Risks
• New NPL formation re-accelerates.
• Higher-than-expected margin
compression owing to persisting asset
quality issues.
• Muted system-wide loan growth.
Price Target Rs565 Derived from our probability weighted residual income model.
Bull
Case
Rs735
2.0x F2013e
BVPS
Stronger than expected macro picture drives growth. Loan
growth averages 25% in F2012/13. Margins hold up closer to
current levels (3.1%). Credit costs drop materially below current
levels to 50 bps (driven by sharper than expected recoveries).
Base
Case
Rs585
1.6x F2013e
BVPS
Margins normalize gradually in F2012; credit costs decline:
Loan book grows at 16% in F2012 and 18% in F2013. We expect
normalization in margins from current levels of 3.1% (on reported
basis) to 2.8% by end F2012. Building in credit costs of 63 bps in
F2012 versus 65 bps in F2011 and 113 bps in F2010.
Bear
Case
Rs325
0.9x F2013e
BVPS
Disruptive rise in interest rates owing to persisting inflation:
Loan growth and margins are lower that expected at 13% and 2.4%
respectively. Flow of impaired loan formation resumes and credit
costs are higher than base case at 125 bps in F2012/F2013.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Investment Thesis
• Between September 2009 and
September 2010 – BOI’s credit costs
were higher and its margin expansion
was weaker than peers. Both trends
have seen material improvement.
• We believe that a part of the asset
quality pressure stemmed from
front-loading by the new management.
• Valuations are attractive – BOI is
trading at 7.5x F2012e earnings, 1.2x
BV and 4.3x core PPOP.
• As the bank continues to deliver on
improving revenues and asset quality
– it could see more outperformance.
Key Value Drivers
• Margin progression.
• Trend in loan growth.
• Fee income growth.
• Credit costs.
• Operating costs.
Potential Catalysts
• New NPL formation in F2012.
• Margin trends.
• Trend in system-wide loan growth.
• Fee income progression.
Key Risks
• New NPL formation re-accelerates.
• Higher-than-expected margin
compression owing to persisting asset
quality issues.
• Muted system-wide loan growth.
Price Target Rs565 Derived from our probability weighted residual income model.
Bull
Case
Rs735
2.0x F2013e
BVPS
Stronger than expected macro picture drives growth. Loan
growth averages 25% in F2012/13. Margins hold up closer to
current levels (3.1%). Credit costs drop materially below current
levels to 50 bps (driven by sharper than expected recoveries).
Base
Case
Rs585
1.6x F2013e
BVPS
Margins normalize gradually in F2012; credit costs decline:
Loan book grows at 16% in F2012 and 18% in F2013. We expect
normalization in margins from current levels of 3.1% (on reported
basis) to 2.8% by end F2012. Building in credit costs of 63 bps in
F2012 versus 65 bps in F2011 and 113 bps in F2010.
Bear
Case
Rs325
0.9x F2013e
BVPS
Disruptive rise in interest rates owing to persisting inflation:
Loan growth and margins are lower that expected at 13% and 2.4%
respectively. Flow of impaired loan formation resumes and credit
costs are higher than base case at 125 bps in F2012/F2013.
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