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Investment Thesis
• Valuation of 1.2x F12e BV and 10.4x
F12e earnings, implying that much of
the improvement in fundamentals is
already reflected in the price.
• INGV has started to close the growth
and profitability gap versus peers. It
delivered ROA of 0.86% in F9M2011,
and loan book is growing 23% YoY.
• Expect INGV to maintain growth trend
and ROA at 0.9% in F2012-13
• Well positioned in terms of asset
quality – new NPL formation is slowing,
NPL coverage ratio is above minimum
RBI requirement of 70%.
• One of India’s oldest private sector
banks but still relatively small, with 475
branches and a loan book of
US$4.5bn (0.6% market share).
Key Value Drivers
• Ability to gain share of system loans
and deposits, especially CASA;
• Further improvement in liability
franchise, leading to margin stability;
• Faster productivity improvement,
leading to better cost metrics;
• Management’s ability to control risk
and hence credit costs.
Potential Catalysts
• Quarterly results from INGV;
• Wholesale funding rates (35-40% of
deposit base is bulk deposits/CDs);
• Any events materially affecting parent
company, ING.
Risks
• Upside: Cost efficiency improvement
is faster than expected; stronger
system- wide loan growth aids
revenue progression.
• Downside: Slower-than-expected
loan growth; greater-than-expected
margin compression owing to a sharp
rise in short rates; asset-quality
concerns.
Price Target Rs355 Derived from our probability-weighted residual income model
Bull
Case
Rs490
1.9x F2013e
BVPS
Growth surprises to the upside: Loan growth averages 30% in
F2012-13. CASA traction is stronger than expected, supporting
NIMs near current levels. Strong revenue trends and better-thanexpected
productivity improvement drive cost:income lower at
faster pace. Credit costs drop to 50bps – well below normalized
levels – in F2012-13 as ROA improves to 1.2% average.
Base
Case
Rs350
1.4x F2013e
BVPS
Growth remains robust; core metrics continue to improve:
Loan book growth averages 18% in F2012-13. Margins compress
in near term as rising deposit costs filter through. Cost efficiency
continues to improve gradually. Given strong macro, credit costs
drop to below-normal levels of ~70 bps in F2012-13. ROA is stable
at 0.9% in F2012/13.
Bear
Case
Rs240
0.9x F2013e
BVPS
Slowing growth triggers partial reversal of fundamental
improvements: As risk aversion increases, INGV expands loan
book in F2012-13 at below 15% levels. Withdrawal of capital flows
leads to further tightening of domestic liquidity, causing margins to
compress more sharply than expected. Credit costs are higher
than expected, at 120bps, in F2011-13 as ROA averages 0.7%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Investment Thesis
• Valuation of 1.2x F12e BV and 10.4x
F12e earnings, implying that much of
the improvement in fundamentals is
already reflected in the price.
• INGV has started to close the growth
and profitability gap versus peers. It
delivered ROA of 0.86% in F9M2011,
and loan book is growing 23% YoY.
• Expect INGV to maintain growth trend
and ROA at 0.9% in F2012-13
• Well positioned in terms of asset
quality – new NPL formation is slowing,
NPL coverage ratio is above minimum
RBI requirement of 70%.
• One of India’s oldest private sector
banks but still relatively small, with 475
branches and a loan book of
US$4.5bn (0.6% market share).
Key Value Drivers
• Ability to gain share of system loans
and deposits, especially CASA;
• Further improvement in liability
franchise, leading to margin stability;
• Faster productivity improvement,
leading to better cost metrics;
• Management’s ability to control risk
and hence credit costs.
Potential Catalysts
• Quarterly results from INGV;
• Wholesale funding rates (35-40% of
deposit base is bulk deposits/CDs);
• Any events materially affecting parent
company, ING.
Risks
• Upside: Cost efficiency improvement
is faster than expected; stronger
system- wide loan growth aids
revenue progression.
• Downside: Slower-than-expected
loan growth; greater-than-expected
margin compression owing to a sharp
rise in short rates; asset-quality
concerns.
Price Target Rs355 Derived from our probability-weighted residual income model
Bull
Case
Rs490
1.9x F2013e
BVPS
Growth surprises to the upside: Loan growth averages 30% in
F2012-13. CASA traction is stronger than expected, supporting
NIMs near current levels. Strong revenue trends and better-thanexpected
productivity improvement drive cost:income lower at
faster pace. Credit costs drop to 50bps – well below normalized
levels – in F2012-13 as ROA improves to 1.2% average.
Base
Case
Rs350
1.4x F2013e
BVPS
Growth remains robust; core metrics continue to improve:
Loan book growth averages 18% in F2012-13. Margins compress
in near term as rising deposit costs filter through. Cost efficiency
continues to improve gradually. Given strong macro, credit costs
drop to below-normal levels of ~70 bps in F2012-13. ROA is stable
at 0.9% in F2012/13.
Bear
Case
Rs240
0.9x F2013e
BVPS
Slowing growth triggers partial reversal of fundamental
improvements: As risk aversion increases, INGV expands loan
book in F2012-13 at below 15% levels. Withdrawal of capital flows
leads to further tightening of domestic liquidity, causing margins to
compress more sharply than expected. Credit costs are higher
than expected, at 120bps, in F2011-13 as ROA averages 0.7%.
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