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Investment Thesis
• Margin improvement over the past
year has benefited from low short rates.
CASA/deposits ratio is low at 15% vs.
35% for the system (Mar’10) and bulk
deposits form ~60% of their term
deposits — implying that margins will
compress as the full impact of rising
rates filters through.
• Asset quality is a concern given the
impaired loans ratio at 10.1% (avg. for
our coverage is 5.5%). We expect
credit costs to remain elevated through
F2012.
• Even after factoring in the recent
capital infusion from the government
(which resulted in share count
increasing by 35%) – Tier I ratio is only
8.84% (avg. ~10.5% for our coverage)
• Valuations at 8.9x earnings and 1.0x
BV on our F2012 estimates look
expensive in the context of uncertainty
on margin progression and asset
quality stress.
Key Value Drivers
• NIM
• Credit costs
• Loan growth
• Fee income
Potential Catalysts
• Asset quality & CASA/deposits trends
over the next few quarters
• Trend in short rates
• News flow related to additional capital
raising
Risks
• Upside: Better-than-expected NIMs,
CASA/deposits and asset quality.
• Downside: Higher-than-expected
credit cost and sharp rise in short
rates.
Price Target Rs110 Derived from our probability weighted residual income model
Bull
Case
Rs175
1.3x F2013e
BVPS
Stronger-than-expected economic growth. Loan and deposit
growth in F2012/13 higher than base case estimates at 20% —
driving stronger NII and fee income growth. Margin progression is
better than expected owing to better CASA traction; Credit costs
drop materially below base case estimate to 50 bps in F2012-13.
Base
Case
Rs105
0.8x F2013e
BVPS
Margins compress and credit costs decline. Expect margins to
compress by ~60 bps to 1.70% by F4Q12 from current reported
level of 2.28%. Expect credit costs to decline to 75 bps in F2012
from current levels of 148 bps.
Bear
Case
Rs70
0.5x F2013e
BVPS
Disruptive rise in rates: Loan growth slows down sharply,
CASA/deposits falls sharply and margins compress more than
expectations. Impaired loan formation re-accelerates, implying that
credit costs remain higher for longer (at ~150 bps).
Source: FactSet, Morgan Stanley Research
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Investment Thesis
• Margin improvement over the past
year has benefited from low short rates.
CASA/deposits ratio is low at 15% vs.
35% for the system (Mar’10) and bulk
deposits form ~60% of their term
deposits — implying that margins will
compress as the full impact of rising
rates filters through.
• Asset quality is a concern given the
impaired loans ratio at 10.1% (avg. for
our coverage is 5.5%). We expect
credit costs to remain elevated through
F2012.
• Even after factoring in the recent
capital infusion from the government
(which resulted in share count
increasing by 35%) – Tier I ratio is only
8.84% (avg. ~10.5% for our coverage)
• Valuations at 8.9x earnings and 1.0x
BV on our F2012 estimates look
expensive in the context of uncertainty
on margin progression and asset
quality stress.
Key Value Drivers
• NIM
• Credit costs
• Loan growth
• Fee income
Potential Catalysts
• Asset quality & CASA/deposits trends
over the next few quarters
• Trend in short rates
• News flow related to additional capital
raising
Risks
• Upside: Better-than-expected NIMs,
CASA/deposits and asset quality.
• Downside: Higher-than-expected
credit cost and sharp rise in short
rates.
Price Target Rs110 Derived from our probability weighted residual income model
Bull
Case
Rs175
1.3x F2013e
BVPS
Stronger-than-expected economic growth. Loan and deposit
growth in F2012/13 higher than base case estimates at 20% —
driving stronger NII and fee income growth. Margin progression is
better than expected owing to better CASA traction; Credit costs
drop materially below base case estimate to 50 bps in F2012-13.
Base
Case
Rs105
0.8x F2013e
BVPS
Margins compress and credit costs decline. Expect margins to
compress by ~60 bps to 1.70% by F4Q12 from current reported
level of 2.28%. Expect credit costs to decline to 75 bps in F2012
from current levels of 148 bps.
Bear
Case
Rs70
0.5x F2013e
BVPS
Disruptive rise in rates: Loan growth slows down sharply,
CASA/deposits falls sharply and margins compress more than
expectations. Impaired loan formation re-accelerates, implying that
credit costs remain higher for longer (at ~150 bps).
Source: FactSet, Morgan Stanley Research
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