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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Asia Financials
A lpha Preferences
�� Most preferred: Bank of Ayudhya (BAY), Federal Bank and OCBC
Most: BAY, Federal Bank, and OCBC. BAY is in a strong position to achieve the
highest two-year earnings CAGR (+42% CAGR in 2010-12E) among the top five Thai
banks. This will boost its sustainable ROE from 9% in 2010 to 15% in 2012E. It is
trading on 1.7x ’10 PB and 12.4x ‘11E PE. Federal Bank is the largest of India’s older
generation of private sector banks in terms of assets. We believe it is on the verge of a
turnaround in its operations catalysed by a change in leadership and a cyclical
improvement in asset quality. It is trading at 1.3x FY11E PB (15% discount to peer
banks) with FY12e ROE of 14.3%. We view OCBC’s acquisition of ING Asia Private
Bank as a significant milestone in its strategy to build up its wealth management
business. It is trading on 1.7x ‘10 P/B, with ‘11E ROE of 12.3%.
�� Least Preferred: HKEx and Hang Seng Bank; remove Bank of India (BOI)
We believe BOI will witness more NIM pressure than other Indian banks while low
Tier-1 also restricts the ability to grow significantly higher than system. However,
given the poor share price performance in the past week (down 19%), we believe scope
for further downside is relatively limited and therefore we remove BOI from our least
preferred list. For HKEx, we expect the company to experience more earning
downgrades in 1H11 as market turnover continues to be disappointing. It is trading at
an expensive 30x 1-year forward P/E, above its 10 year average of 22x. Hang Seng
Bank’s fast capital burn arising from its high cash payout ratio and balance sheet mix
shift out of bonds towards loans is unsustainable. And the relative importance of the
dividend is reduced in management’s eyes. The stock is currently at 4.2x ‘10 adjusted
book value with ‘11E clean ROE of 27%.
Buy
India
Banks
We recently initiated coverage on Federal Bank, a mid-sized private sector bank, with a Buy
rating and price target of Rs600. The bank is the largest of India’s older generation of private
sector banks in terms of assets, with 737 branches (60% in Kerala) and a balance sheet of
Rs428bn. We believe FB is on the verge of a turnaround in its operations catalysed by a
change in leadership and a cyclical improvement in asset quality. We expect credit growth,
which has been subdued, to revive: we forecast 15% growth in FY11 and 25% in FY12. The
new CEO is focusing on improving the contribution of fee-based income (one of the lowest
in the industry), which we expect to offset the cyclical decline in NIMs. We believe pick up
in asset growth and a decline in credit costs will support earnings growth of 31% over FY11-
13E, one of our highest forecast growth rates for the industry. Asset quality has been under
pressure at FB due to a cyclical downturn accentuated by weak risk management practices.
Growth has also been sluggish due to an increasing NPA burden and lack of focus as
leadership changed hands. We view the change in CEO as an inflection point for the bank as
we believe management’s focus is now on risk management, and expect recoveries to lead to
significant reduction in NPA and consequently credit costs, over the next 12 months. We
expect NPA to decline from 3.9% in December 2010 to less than 3% by end-FY12,
supported by declining additions and improving recoveries.
We believe catalysts for a re-rating are in place as we expect: 1) NPA to decline; 2) credit
growth to accelerate; and 3) fee income to improve. As in the rest of the sector, we expect the
bank’s NIM to decline from the current level of 4.3% due to the increasing proportion of
higher rated corporate loans in the portfolio and the rising cost of funds.
At 1.3x FY11E book, valuations are at a significant 15% discount to peer banks. While direct
comparisons with new generation private banks might not be appropriate, we also view such
a steep valuation discount as unreasonable. We believe Federal Bank’s fair valuation lies
between public sector (PSU) banks and new generation private bank valuations, which forms
the basis of our target residual income-based P/BV multiple of 1.5x FY12E book.
— Valuation: Our price target of Rs 600 is based on 1.5x FY12E book (at premium to 5
year average PBR due to improved RoE).
— Risk: The key risk to our thesis is a delay in execution by the new management due
to non-cooperation of unionised employees. We believe friction between
management and employees has declined over the years with improved
communication channels, the introduction of performance-based incentives, and
technology implementation. However, we think it remains the biggest impediment to
the bank scaling up in line with other private sector banks. We believe delay in asset
quality improvement could be a risk to earnings recovery as we expect NPA to
recover from the current 3.9% to below 3% by end-FY12.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Asia Financials
A lpha Preferences
�� Most preferred: Bank of Ayudhya (BAY), Federal Bank and OCBC
Most: BAY, Federal Bank, and OCBC. BAY is in a strong position to achieve the
highest two-year earnings CAGR (+42% CAGR in 2010-12E) among the top five Thai
banks. This will boost its sustainable ROE from 9% in 2010 to 15% in 2012E. It is
trading on 1.7x ’10 PB and 12.4x ‘11E PE. Federal Bank is the largest of India’s older
generation of private sector banks in terms of assets. We believe it is on the verge of a
turnaround in its operations catalysed by a change in leadership and a cyclical
improvement in asset quality. It is trading at 1.3x FY11E PB (15% discount to peer
banks) with FY12e ROE of 14.3%. We view OCBC’s acquisition of ING Asia Private
Bank as a significant milestone in its strategy to build up its wealth management
business. It is trading on 1.7x ‘10 P/B, with ‘11E ROE of 12.3%.
�� Least Preferred: HKEx and Hang Seng Bank; remove Bank of India (BOI)
We believe BOI will witness more NIM pressure than other Indian banks while low
Tier-1 also restricts the ability to grow significantly higher than system. However,
given the poor share price performance in the past week (down 19%), we believe scope
for further downside is relatively limited and therefore we remove BOI from our least
preferred list. For HKEx, we expect the company to experience more earning
downgrades in 1H11 as market turnover continues to be disappointing. It is trading at
an expensive 30x 1-year forward P/E, above its 10 year average of 22x. Hang Seng
Bank’s fast capital burn arising from its high cash payout ratio and balance sheet mix
shift out of bonds towards loans is unsustainable. And the relative importance of the
dividend is reduced in management’s eyes. The stock is currently at 4.2x ‘10 adjusted
book value with ‘11E clean ROE of 27%.
Buy
India
Banks
We recently initiated coverage on Federal Bank, a mid-sized private sector bank, with a Buy
rating and price target of Rs600. The bank is the largest of India’s older generation of private
sector banks in terms of assets, with 737 branches (60% in Kerala) and a balance sheet of
Rs428bn. We believe FB is on the verge of a turnaround in its operations catalysed by a
change in leadership and a cyclical improvement in asset quality. We expect credit growth,
which has been subdued, to revive: we forecast 15% growth in FY11 and 25% in FY12. The
new CEO is focusing on improving the contribution of fee-based income (one of the lowest
in the industry), which we expect to offset the cyclical decline in NIMs. We believe pick up
in asset growth and a decline in credit costs will support earnings growth of 31% over FY11-
13E, one of our highest forecast growth rates for the industry. Asset quality has been under
pressure at FB due to a cyclical downturn accentuated by weak risk management practices.
Growth has also been sluggish due to an increasing NPA burden and lack of focus as
leadership changed hands. We view the change in CEO as an inflection point for the bank as
we believe management’s focus is now on risk management, and expect recoveries to lead to
significant reduction in NPA and consequently credit costs, over the next 12 months. We
expect NPA to decline from 3.9% in December 2010 to less than 3% by end-FY12,
supported by declining additions and improving recoveries.
We believe catalysts for a re-rating are in place as we expect: 1) NPA to decline; 2) credit
growth to accelerate; and 3) fee income to improve. As in the rest of the sector, we expect the
bank’s NIM to decline from the current level of 4.3% due to the increasing proportion of
higher rated corporate loans in the portfolio and the rising cost of funds.
At 1.3x FY11E book, valuations are at a significant 15% discount to peer banks. While direct
comparisons with new generation private banks might not be appropriate, we also view such
a steep valuation discount as unreasonable. We believe Federal Bank’s fair valuation lies
between public sector (PSU) banks and new generation private bank valuations, which forms
the basis of our target residual income-based P/BV multiple of 1.5x FY12E book.
— Valuation: Our price target of Rs 600 is based on 1.5x FY12E book (at premium to 5
year average PBR due to improved RoE).
— Risk: The key risk to our thesis is a delay in execution by the new management due
to non-cooperation of unionised employees. We believe friction between
management and employees has declined over the years with improved
communication channels, the introduction of performance-based incentives, and
technology implementation. However, we think it remains the biggest impediment to
the bank scaling up in line with other private sector banks. We believe delay in asset
quality improvement could be a risk to earnings recovery as we expect NPA to
recover from the current 3.9% to below 3% by end-FY12.
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