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We met management of the bank to understand business environment and strategy.
Slowdown in business- The management has been witnessing slowdown in loan growth
especially in wholesale business due to higher interest rates. Loan growth guidance for FY12
has been scaled down to ~ 16-17% driven by large corporate, mid corporate and SME
segments. In order to increase business in SME and retail segment, the bank has set up retail
and SME focused business centers for quick processing and disbursement which will drive
loan book growth in medium term. We expect loan book to grow at 17.7% CAGR over FY11-
FY13E driven by corporate and mid corporate segments, lower than the industry average.
Deposit growth is likely to be ~ 16-17% for FY12; however, we expect deposits to grow 17%
CAGR over FY11-13E.
22bps NIM contraction in FY12: The management has guided us that NIM will contract 22bps
to ~ 2.7% (reported) mainly attributable to domestic business and increase in cost of fund.
However, we are building in 28bps compression in NIM in FY12 to factor higher slippages and
reversal of income in NPA accounts.
Moderation in fee income – Fee income grew 14.7% CAGR over FY08-FY11 lower than credit
growth. Fee income has been continued to track balance sheet growth rather than
transaction driven fee income streams, however, the bank aims to generate transactional
fee income through off balance business along with credit related fee to maintain fee
income growth of ~ 15% in FY12. Fee income is likely to grow 16.3% CAGR over FY11-13E.
Adequately provided for employee related provisions- The bank has provided Rs442.4
crore and Rs85.8 crore towards pension and gratuity in FY11, remaining Rs2112.9 crore to be
provided in next four years. The bank is likely to provide ~ Rs1000 crore towards employee
related provision against Rs1361.2 crore provided in FY11. We believe adequately provision
on employee related expenses coupled with better productivity will result into improvement
in cost to income ratio.
Asset quality remains key concerns- Loan accounts above Rs5 lacs are monitored without
manual intervention in the bank. The bank expects to complete system based NPA
recognition process by Sept.2011, which may result into one off increase in slippages in
Q2FY12. Loan loss provisioning remains at elevated levels in Q2FY12. Given pending
proposals for restructuring of certain telecom loans and aviation sector, we remain cautious
on the bank’s asset quality and factor in 75bps credit cost in FY12 against 55bps in FY11.
Valuation & Recommendation
The stock has underperformed by 13.2% and 14.3% Bankex & Sensex respectively in last three
months mainly on account of margin contraction, volatile earnings trends and risk emerging
from stress in asset quality. We believe margin contraction, extension in NPA cycle and
sluggish global economic environment for overseas business, lower RoE of ~16% continue to
act major headwinds for stock performance. At Rs335, the stock is trading at 1x P/ABV on
FY13e book and 5.3x FY13e earnings. We maintain our reduce rating on the stock with
revised TP of Rs351 valuing 1x FY13 adjusted book factoring macro risk in valuation multiple,
implying upside 4.8%.
Other key highlights
• Aviation and SEB exposure stood at Rs4, 200 crore and Rs11, 000 crore respectively.
• Countercyclical provision is at Rs580 crore and full provision has been made on standard restructured assets pool.
• Size of written off assets stands at Rs5,000 crore (28.9% of net worth).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We met management of the bank to understand business environment and strategy.
Slowdown in business- The management has been witnessing slowdown in loan growth
especially in wholesale business due to higher interest rates. Loan growth guidance for FY12
has been scaled down to ~ 16-17% driven by large corporate, mid corporate and SME
segments. In order to increase business in SME and retail segment, the bank has set up retail
and SME focused business centers for quick processing and disbursement which will drive
loan book growth in medium term. We expect loan book to grow at 17.7% CAGR over FY11-
FY13E driven by corporate and mid corporate segments, lower than the industry average.
Deposit growth is likely to be ~ 16-17% for FY12; however, we expect deposits to grow 17%
CAGR over FY11-13E.
22bps NIM contraction in FY12: The management has guided us that NIM will contract 22bps
to ~ 2.7% (reported) mainly attributable to domestic business and increase in cost of fund.
However, we are building in 28bps compression in NIM in FY12 to factor higher slippages and
reversal of income in NPA accounts.
Moderation in fee income – Fee income grew 14.7% CAGR over FY08-FY11 lower than credit
growth. Fee income has been continued to track balance sheet growth rather than
transaction driven fee income streams, however, the bank aims to generate transactional
fee income through off balance business along with credit related fee to maintain fee
income growth of ~ 15% in FY12. Fee income is likely to grow 16.3% CAGR over FY11-13E.
Adequately provided for employee related provisions- The bank has provided Rs442.4
crore and Rs85.8 crore towards pension and gratuity in FY11, remaining Rs2112.9 crore to be
provided in next four years. The bank is likely to provide ~ Rs1000 crore towards employee
related provision against Rs1361.2 crore provided in FY11. We believe adequately provision
on employee related expenses coupled with better productivity will result into improvement
in cost to income ratio.
Asset quality remains key concerns- Loan accounts above Rs5 lacs are monitored without
manual intervention in the bank. The bank expects to complete system based NPA
recognition process by Sept.2011, which may result into one off increase in slippages in
Q2FY12. Loan loss provisioning remains at elevated levels in Q2FY12. Given pending
proposals for restructuring of certain telecom loans and aviation sector, we remain cautious
on the bank’s asset quality and factor in 75bps credit cost in FY12 against 55bps in FY11.
Valuation & Recommendation
The stock has underperformed by 13.2% and 14.3% Bankex & Sensex respectively in last three
months mainly on account of margin contraction, volatile earnings trends and risk emerging
from stress in asset quality. We believe margin contraction, extension in NPA cycle and
sluggish global economic environment for overseas business, lower RoE of ~16% continue to
act major headwinds for stock performance. At Rs335, the stock is trading at 1x P/ABV on
FY13e book and 5.3x FY13e earnings. We maintain our reduce rating on the stock with
revised TP of Rs351 valuing 1x FY13 adjusted book factoring macro risk in valuation multiple,
implying upside 4.8%.
Other key highlights
• Aviation and SEB exposure stood at Rs4, 200 crore and Rs11, 000 crore respectively.
• Countercyclical provision is at Rs580 crore and full provision has been made on standard restructured assets pool.
• Size of written off assets stands at Rs5,000 crore (28.9% of net worth).
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