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We met with management at BOI. We continue with our UW rating in spite
of the 15% underperformance over the past two months. Delinquencies are
likely to remain elevated and also constrain NII, leading to higher-thanexpected
margin contraction in FY12. We cut EPS by ~10% for FY12E-
13E. Valuations at 1.1x FY12E book do not look cheap considering suboptimal
ROAs of <85bp and ROEs <16% for FY12E-13E.
Margin pressure to continue: Although 1Q FY12 margin contraction
included one-offs, we do not expect margins to bounce back in the near
term. A rise in PLR/base rate would only offset deposit re-pricing but
high delinquencies and interest reversal relating to system-based NPA
recognition would continue in 2Q FY12 and keep margins depressed.
Asset quality: We believe asset quality could get worse before it
improves. System-based NPA recognition is likely to continue to keep
delinquencies high in the near term with corresponding interest reversal
also affecting margins. Also, high power exposure and increasing SME
focus in the current high-interest-rate environment could be a risk.
Capital – Dilution risks high: Low tier-1 capital at 8.3% and falling
profitability makes BOI vulnerable to dilution risks. In spite of the
Rs10B capital infusion by the government in FY11, CAR is below
threshold levels. We factor in Rs25B of dilution at current prices, which
we estimate is EPS-dilutive and also not book-accretive, as in the case of
most private banks or large PSUs capital raising. Weak capital markets
could delay capital-raising, which could further affect growth.
Return ratios likely to remain sub optimal; maintain Underweight:
Factoring in ~40bp margin contraction in FY12, we cut our estimates by
10-11% over FY12-13 and are ~10% lower than consensus now. We
expect margin and asset quality pressure to continue and return ratios to
remain sub-optimal over FY11-13. Also current valuations at 1.1x
FY12E book do not appear cheap considering ROA/ROE contraction
over FY09-12E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We met with management at BOI. We continue with our UW rating in spite
of the 15% underperformance over the past two months. Delinquencies are
likely to remain elevated and also constrain NII, leading to higher-thanexpected
margin contraction in FY12. We cut EPS by ~10% for FY12E-
13E. Valuations at 1.1x FY12E book do not look cheap considering suboptimal
ROAs of <85bp and ROEs <16% for FY12E-13E.
Margin pressure to continue: Although 1Q FY12 margin contraction
included one-offs, we do not expect margins to bounce back in the near
term. A rise in PLR/base rate would only offset deposit re-pricing but
high delinquencies and interest reversal relating to system-based NPA
recognition would continue in 2Q FY12 and keep margins depressed.
Asset quality: We believe asset quality could get worse before it
improves. System-based NPA recognition is likely to continue to keep
delinquencies high in the near term with corresponding interest reversal
also affecting margins. Also, high power exposure and increasing SME
focus in the current high-interest-rate environment could be a risk.
Capital – Dilution risks high: Low tier-1 capital at 8.3% and falling
profitability makes BOI vulnerable to dilution risks. In spite of the
Rs10B capital infusion by the government in FY11, CAR is below
threshold levels. We factor in Rs25B of dilution at current prices, which
we estimate is EPS-dilutive and also not book-accretive, as in the case of
most private banks or large PSUs capital raising. Weak capital markets
could delay capital-raising, which could further affect growth.
Return ratios likely to remain sub optimal; maintain Underweight:
Factoring in ~40bp margin contraction in FY12, we cut our estimates by
10-11% over FY12-13 and are ~10% lower than consensus now. We
expect margin and asset quality pressure to continue and return ratios to
remain sub-optimal over FY11-13. Also current valuations at 1.1x
FY12E book do not appear cheap considering ROA/ROE contraction
over FY09-12E.
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