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A balanced growth trajectory
Like other government owned banks that have become aggressive
lenders, BoB too has increased its market share during 9MFY11 to
4% v/s 3.8% yoy. Overall advances have grown by 33% yoy and
domestic advances by 31%yoy in 9MFY11. This is significantly higher
than industry credit growth rates of 24%yoy registered in 9MFY11.
Importantly, growth has been achieved in its focus area viz. corporate
assets. The bank has maintained share of retail assets at 19% and
SME at ~16%.
The deposit growth is also ahead of industry at 31% (industry – 16.5%),
while low cost deposit have grown 23%. Share of CASA remains at
~29% (Dec’10)
We believe BoB is likely to continue its trajectory of higher than industry
growth rates which will reflect in the 24% loan book CAGR over FY10-
12. Although a tight liquidity environment will exert pressure on CASA
ratios, we expect the extensive liability franchise to be maintained at
~28% over FY12 and FY13.
We expect higher credit deposit ratio of 75% plus improvement in
yield on loans to protect margins in FY12 and an easing liquidity
environment in FY13 to cap margins at 2.8% in FY13.
In all, the growth rates, and the quality of growth – in deposits and
assets - do not leave room for complaint.
Cashing in on regional shifts of growth
BoB has a well distributed domestic branch network of 3,259
branches. A high proportion of branches 57% are in the state of Gujarat
(22%) and Northern Indian states – states known for their
entrepreneurial tendencies. This positions the bank to capture
business from emerging, and mid-sized corporations.
Based on Sep’10 data from RBI, incremental credit growth appears
to have shifted from rural and semi urban to metro and urban regions.
We expect this trend to continue over the medium term. Currently
these regions constitute ~40% of BoB’s branch network and leave it
well poised to capture incremental credit growth. Over the next 12-15
months BoB plans to open 860 branches well-diversified across India
with more thrust on Northern & Gujarat zones. This will further enable
the bank to capture shifting growth patterns that may emerge over the
next 2-3 years.
Healthy provisioning and lower slippages stabilizes asset quality
The bank has been growing higher than industry for the past 3-4 quarters. The balance sheet
factors in positives of a reasonable diversified asset mix of corporate, SME, retail, agri and
international assets. During the past 3-4 quarters the bank has seen increase in absolute
level of gross and net npas (although as a per cent of loan book the ratio has remained
reasonable).
Delinquencies in housing and agricultural assets are the highest contributors to npas. Despite
this, the bank has maintained a healthy npa coverage ratio of 85.5% (with technical write-offs)
and incremental delinquency ratio at 0.91% (`12.3 bn for 9MFY10).
Restructured assets remained one of the lowest among peers at `60.5 bn (2.9% of loan book
Dec’10). In Q3FY11, BoB restructured ~`6 bn of loans relating to exposure towards airline
industry. About 9% of restructured loans turned into NPA and we have assumed similar levels
over next 2 years.
Going forward we have assumed gross npa increase of 21% CAGR over FY10-13 (1.3% of
credit) and a 73% PCR (excluding write offs).
Productivity and improving operating ratios
Operating income and PAT is likely to be driven by NII growth of 25% and 27% CAGR over
FY10-13E. A strong liability franchise, low cost deposit base has resulted in cost of deposits
of 4.5% in 9MFY11 (5% in FY13E). NIMs are likely to increase to 2.8% by FY13.
A 100% CBS of the domestic branches has enabled BoB improve branch productivity and
launch technology dependent products (cash management services, internet based platform
for individuals – in particular non-resident Indians). Fee income has lagged growth in core
business income; we expect the above initiatives would facilitate higher growth of non interest
income.
Opex ratios have improved over the past 5 years from 2% in FY07 to 1.5% in FY11. Despite
additional branches and employee addition over the next 2 years we expect efficiencies to
maintain operating leverage and C/I ratios.
Fresh capital- Gears up balance sheet for growth
GoI has infused capital of `24.6 bn in BoB in April 2011. Thus BoB’s CAR of 12.45% (Dec’10)
is likely to improve to CAR by 170-190 bps giving BoB a well-capitalized balance sheet. This
provides adequate room for the balance sheet to grow ~24% CAGR, implying a loan book
growth of 26% CAGR over FY10-13E. Post capital infusion GoI stake in BoB stands at 57%.
Credit growth drivers are currently tilted towards urban and metro growth. The continuance of
the current liquidity environment is likely to carry forward this trend over the next couple of
quarters. BoB is uniquely poised with a network of 3,529 branches balanced to capture both
urban and rural growth. The bank has a retail base of 38 mn customers and at the same time
maintains a strong corporate client network. This facilitates faster growth and the ability to
capture both sides of the spectrum as compared to peers. In this scenario we believe that
BoB among government owned banks, with a wider branch network, and a focus on core
banking are poised to do better than pure rural-centric public sector counter-parts.
While macro headwinds, relating to inflation and rising rates, still persist (especially given the
volatility in oil prices), we still believe banks are likely to deliver 20-35% earnings growth in
FY12. Frontline banks in the government owned and private space such as SBI, BoB, PNB,
ICICI Bank, Axis Bank and HDFC Bank could lead the earnings growth in FY12, in our view.
BoB has some key advantages which would counterbalance the moderation of credit flow and
rising rates such as (1) a low CD ratio enables scaling by ~300 bps (2) robust liability franchise
to compensate the rising rate curve (3) Operating leverage to enable earnings momentum in
FY12, (4) capital infusion to dispose of concerns on maturing growth rates. We believe BoB
presents itself as a logical candidate within the public banking space.
We expect the bank to post RoA of 1.3% over FY12E and FY13E. The capital infusion is likely
to suppress RoEs from 23.7% in FY11E to 22% in FY12 and FY13. This is likely to distort RoE
comparisons between peers.
Currently, BoB trades at a P/ABV of 1.6x FY12 on our ABV of `588.8 and 1.3x on FY13 ABV of
`721.9 per share. We have valued BoB at 1.5x P/ABV on our FY13E ABV which translates to a
target price of `1,086 per share.Hold.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
A balanced growth trajectory
Like other government owned banks that have become aggressive
lenders, BoB too has increased its market share during 9MFY11 to
4% v/s 3.8% yoy. Overall advances have grown by 33% yoy and
domestic advances by 31%yoy in 9MFY11. This is significantly higher
than industry credit growth rates of 24%yoy registered in 9MFY11.
Importantly, growth has been achieved in its focus area viz. corporate
assets. The bank has maintained share of retail assets at 19% and
SME at ~16%.
The deposit growth is also ahead of industry at 31% (industry – 16.5%),
while low cost deposit have grown 23%. Share of CASA remains at
~29% (Dec’10)
We believe BoB is likely to continue its trajectory of higher than industry
growth rates which will reflect in the 24% loan book CAGR over FY10-
12. Although a tight liquidity environment will exert pressure on CASA
ratios, we expect the extensive liability franchise to be maintained at
~28% over FY12 and FY13.
We expect higher credit deposit ratio of 75% plus improvement in
yield on loans to protect margins in FY12 and an easing liquidity
environment in FY13 to cap margins at 2.8% in FY13.
In all, the growth rates, and the quality of growth – in deposits and
assets - do not leave room for complaint.
Cashing in on regional shifts of growth
BoB has a well distributed domestic branch network of 3,259
branches. A high proportion of branches 57% are in the state of Gujarat
(22%) and Northern Indian states – states known for their
entrepreneurial tendencies. This positions the bank to capture
business from emerging, and mid-sized corporations.
Based on Sep’10 data from RBI, incremental credit growth appears
to have shifted from rural and semi urban to metro and urban regions.
We expect this trend to continue over the medium term. Currently
these regions constitute ~40% of BoB’s branch network and leave it
well poised to capture incremental credit growth. Over the next 12-15
months BoB plans to open 860 branches well-diversified across India
with more thrust on Northern & Gujarat zones. This will further enable
the bank to capture shifting growth patterns that may emerge over the
next 2-3 years.
Healthy provisioning and lower slippages stabilizes asset quality
The bank has been growing higher than industry for the past 3-4 quarters. The balance sheet
factors in positives of a reasonable diversified asset mix of corporate, SME, retail, agri and
international assets. During the past 3-4 quarters the bank has seen increase in absolute
level of gross and net npas (although as a per cent of loan book the ratio has remained
reasonable).
Delinquencies in housing and agricultural assets are the highest contributors to npas. Despite
this, the bank has maintained a healthy npa coverage ratio of 85.5% (with technical write-offs)
and incremental delinquency ratio at 0.91% (`12.3 bn for 9MFY10).
Restructured assets remained one of the lowest among peers at `60.5 bn (2.9% of loan book
Dec’10). In Q3FY11, BoB restructured ~`6 bn of loans relating to exposure towards airline
industry. About 9% of restructured loans turned into NPA and we have assumed similar levels
over next 2 years.
Going forward we have assumed gross npa increase of 21% CAGR over FY10-13 (1.3% of
credit) and a 73% PCR (excluding write offs).
Productivity and improving operating ratios
Operating income and PAT is likely to be driven by NII growth of 25% and 27% CAGR over
FY10-13E. A strong liability franchise, low cost deposit base has resulted in cost of deposits
of 4.5% in 9MFY11 (5% in FY13E). NIMs are likely to increase to 2.8% by FY13.
A 100% CBS of the domestic branches has enabled BoB improve branch productivity and
launch technology dependent products (cash management services, internet based platform
for individuals – in particular non-resident Indians). Fee income has lagged growth in core
business income; we expect the above initiatives would facilitate higher growth of non interest
income.
Opex ratios have improved over the past 5 years from 2% in FY07 to 1.5% in FY11. Despite
additional branches and employee addition over the next 2 years we expect efficiencies to
maintain operating leverage and C/I ratios.
Fresh capital- Gears up balance sheet for growth
GoI has infused capital of `24.6 bn in BoB in April 2011. Thus BoB’s CAR of 12.45% (Dec’10)
is likely to improve to CAR by 170-190 bps giving BoB a well-capitalized balance sheet. This
provides adequate room for the balance sheet to grow ~24% CAGR, implying a loan book
growth of 26% CAGR over FY10-13E. Post capital infusion GoI stake in BoB stands at 57%.
Credit growth drivers are currently tilted towards urban and metro growth. The continuance of
the current liquidity environment is likely to carry forward this trend over the next couple of
quarters. BoB is uniquely poised with a network of 3,529 branches balanced to capture both
urban and rural growth. The bank has a retail base of 38 mn customers and at the same time
maintains a strong corporate client network. This facilitates faster growth and the ability to
capture both sides of the spectrum as compared to peers. In this scenario we believe that
BoB among government owned banks, with a wider branch network, and a focus on core
banking are poised to do better than pure rural-centric public sector counter-parts.
While macro headwinds, relating to inflation and rising rates, still persist (especially given the
volatility in oil prices), we still believe banks are likely to deliver 20-35% earnings growth in
FY12. Frontline banks in the government owned and private space such as SBI, BoB, PNB,
ICICI Bank, Axis Bank and HDFC Bank could lead the earnings growth in FY12, in our view.
BoB has some key advantages which would counterbalance the moderation of credit flow and
rising rates such as (1) a low CD ratio enables scaling by ~300 bps (2) robust liability franchise
to compensate the rising rate curve (3) Operating leverage to enable earnings momentum in
FY12, (4) capital infusion to dispose of concerns on maturing growth rates. We believe BoB
presents itself as a logical candidate within the public banking space.
We expect the bank to post RoA of 1.3% over FY12E and FY13E. The capital infusion is likely
to suppress RoEs from 23.7% in FY11E to 22% in FY12 and FY13. This is likely to distort RoE
comparisons between peers.
Currently, BoB trades at a P/ABV of 1.6x FY12 on our ABV of `588.8 and 1.3x on FY13 ABV of
`721.9 per share. We have valued BoB at 1.5x P/ABV on our FY13E ABV which translates to a
target price of `1,086 per share.Hold.
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