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Investment Thesis
• Still an early stage growth bank with
only 210 branches and 0.6% market
share in system-wide loans.
• New management team (since early
2008) has made significant progress in
turning around the bank.
• ROA has improved from 0.4% in the
year ended Dec-07 to 1.1% in F2010,
driven by higher margins, fees/assets,
and new management’s efforts to
reinvest in the bank.
• CASA/assets relatively low at 21% –
implying that margin progression could
be challenged in rising rate
environment.
• Pricing power on lending side (strong
demand + disciplined competition)
helping offset funding cost pressure.
• Trades at 15.3x earnings and 2.5x BV
on our F2012 estimates.
Key Value Drivers
• Loan growth
• Margins (function of competition,
CASA/assets and short rate trend)
• Fee income progression
• Asset quality (loan loss provisions:
LLP)
Potential Catalysts
• Trend in short rates
• System-wide loan growth
• Quarterly results (updated data on
CASA/assets)
Key Risks
• Execution on CASA, short rate trends,
system-wide credit offtake, CV sales
trend, and potential equity supply from
promoters.
Price Target Rs305 Derived from our probability-weighted residual income model
Bull
Case
Rs390
4.0x F2013e
BVPS
Stronger macro environment+ better-than-expected liability
franchise traction: Margins move higher to 3.7% in F2012 and
4% by F2013 (in line with management guidance) as
CASA/deposits improves to 35%. LLP/average loans drops to
50bp in F2011-12. Loan growth is stronger than expectations at
35%.
Base
Case
Rs320
3.3x F2013e
BVPS
Robust loan growth + continued execution on liability
franchise: Loan growth is robust at 25% CAGR in F2012-13.
Margins see some compression in F2012 owing to impact of rising
funding cost filters through – however this is buffered by
improvement in liability franchise. Asset quality trends expected to
be benign with LLP/average loans at 68 bps average in F2012-13.
Bear
Case
Rs165
1.7x F2013e
BVPS
Disruptive rise in interest rates; slowdown in loan growth:
Faster-than-expected rise in short rates owing to capital outflows
from the country in this scenario. Margins compress to 2.8%
average in F2012 from current computed levels of 3.7%. Credit
costs return to higher- than-normalized levels of 100bp in
F2011-12.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Investment Thesis
• Still an early stage growth bank with
only 210 branches and 0.6% market
share in system-wide loans.
• New management team (since early
2008) has made significant progress in
turning around the bank.
• ROA has improved from 0.4% in the
year ended Dec-07 to 1.1% in F2010,
driven by higher margins, fees/assets,
and new management’s efforts to
reinvest in the bank.
• CASA/assets relatively low at 21% –
implying that margin progression could
be challenged in rising rate
environment.
• Pricing power on lending side (strong
demand + disciplined competition)
helping offset funding cost pressure.
• Trades at 15.3x earnings and 2.5x BV
on our F2012 estimates.
Key Value Drivers
• Loan growth
• Margins (function of competition,
CASA/assets and short rate trend)
• Fee income progression
• Asset quality (loan loss provisions:
LLP)
Potential Catalysts
• Trend in short rates
• System-wide loan growth
• Quarterly results (updated data on
CASA/assets)
Key Risks
• Execution on CASA, short rate trends,
system-wide credit offtake, CV sales
trend, and potential equity supply from
promoters.
Price Target Rs305 Derived from our probability-weighted residual income model
Bull
Case
Rs390
4.0x F2013e
BVPS
Stronger macro environment+ better-than-expected liability
franchise traction: Margins move higher to 3.7% in F2012 and
4% by F2013 (in line with management guidance) as
CASA/deposits improves to 35%. LLP/average loans drops to
50bp in F2011-12. Loan growth is stronger than expectations at
35%.
Base
Case
Rs320
3.3x F2013e
BVPS
Robust loan growth + continued execution on liability
franchise: Loan growth is robust at 25% CAGR in F2012-13.
Margins see some compression in F2012 owing to impact of rising
funding cost filters through – however this is buffered by
improvement in liability franchise. Asset quality trends expected to
be benign with LLP/average loans at 68 bps average in F2012-13.
Bear
Case
Rs165
1.7x F2013e
BVPS
Disruptive rise in interest rates; slowdown in loan growth:
Faster-than-expected rise in short rates owing to capital outflows
from the country in this scenario. Margins compress to 2.8%
average in F2012 from current computed levels of 3.7%. Credit
costs return to higher- than-normalized levels of 100bp in
F2011-12.
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