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Core operating parameters at peak
Asset quality best among peers; credit cost lowest
BOB is one of the best performing PSU banks. It has consistently been delivering better-than-peers
on key operating parameters. We expect BOB to grow faster than the industry on account of strong
growth in both its domestic as well as overseas operations. However, earnings growth would be
muted at 10% CAGR (on a higher base). NIM declined sharply in 1QFY12 to 2.7% and should stabilize
at current levels. RoA is likely to decline to 1.1% from 1.3% in FY11.
Sharp improvement in core operating parameters: BOB is capitalizing on its inherent strengths of
(1) a large domestic branch network (~3,400), (2) a huge retail customer base, (3) strong brand recall, (4)
healthy corporate relationships, and (5) technological advancement. BOB’s core performance has seen
transformational change under the leadership of the current CMD (due for retirement in November 2012),
with strong improvement in CASA ratio, margins and productivity. The quality of earnings has improved
considerably, with RoA at ~1.3% (v/s 0.9% in FY08) and RoE at ~25% (v/s 15.8% in FY08).
Asset quality better than peers: BOB has a well diversified presence across international, retail and
domestic corporate/SME business, which leads to strong control over asset quality. GNPA ratio at 1.7%,
and PCR at 70% (83% including write-offs) are among the best in the industry. Outstanding restructured
portfolio stood at 4.2% of loans (in line with peers), of which 12.5% have slipped into the NPA category.
Superior operating performance; valuations price in positives: While performance on core operating
parameters like (1) margins, (2) CASA growth, and (3) asset quality is commendable, some of the key
earnings parameters like credit cost, margins and C/I ratio are at its best, in our view. We estimate
earnings CAGR over FY11-13 at ~10%, one of the lowest among peers. Maintain Neutral.
Domestic NIM comparable to peers; best in class asset quality
Domestic NIM of ~3.4% is comparable to
peers; higher share of international loans results
in lower reported NIM. In 1QFY12, NIM
moderated by 23bp despite the benefit of capital
raising in 4QFY11.
Diversified loan portfolio, strong risk
management practices have kept BOB's
slippages and credit cost lower than peers. For
FY11, the slippage ratio was 1.08%, the lowest
in seven years except for FY09 (0.94%).
BOB has recorded a stark improvement in asset
quality in the past few years and its asset quality
remains among the best in class. Net NPAs
remain well below 0.5% levels and provision
cover is strong at 75% (~80%+ including
technical write-offs).
BOB is likely to record earnings CAGR of ~10%
over FY11-13, on the back of high base and
muted earnings growth during FY12. This
coupled with capital infused by the government
would result in lower RoE. Despite the fall, RoE
is likely to remain healthy at ~20%.
1QFY12: Sharp moderation in NIM a negative surprise
In 1QFY12, loans grew ~2% QoQ and 25%
YoY to INR2.3t, much faster than industry
growth. Domestic loans grew 24% YoY, but
remained flat QoQ. SME loans grew ~4% QoQ
to INR284b, whereas agricultural loans declined
~5% QoQ. The share of international business
stood at ~26% v/s 25% a quarter ago.
Despite rapidly rising term deposit rates, BOB's
domestic CASA ratio remained sequentially
stable at ~34%. Though growth in CASA
deposits has moderated to 17% YoY, it remains
healthy.
In 1QFY12, the reported domestic NIM
contracted sharply to 3.4% v/s 4.2% a quarter
ago. However, adjusted for one-offs in 4QFY11
(INR2.5b interest on IT refund), NIM declined
30bp QoQ. Sharp moderation in NIM, despite
INR25b of equity infusion by the government,
is a negative surprise.
In 1QFY12, slippages were INR5.8b
(annualized slippage ratio of 1% v/s 1.5% for
4QFY11 and 1.1% for FY11). Credit cost was
0.2% v/s 0.8% in 4QFY11 and 0.6% in 1QFY11.
PCR (including technical write-offs) was healthy
at 82.5% (v/s 85% a quarter ago). The bank
already has its entire portfolio under CBS for
NPA recognition.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Core operating parameters at peak
Asset quality best among peers; credit cost lowest
BOB is one of the best performing PSU banks. It has consistently been delivering better-than-peers
on key operating parameters. We expect BOB to grow faster than the industry on account of strong
growth in both its domestic as well as overseas operations. However, earnings growth would be
muted at 10% CAGR (on a higher base). NIM declined sharply in 1QFY12 to 2.7% and should stabilize
at current levels. RoA is likely to decline to 1.1% from 1.3% in FY11.
Sharp improvement in core operating parameters: BOB is capitalizing on its inherent strengths of
(1) a large domestic branch network (~3,400), (2) a huge retail customer base, (3) strong brand recall, (4)
healthy corporate relationships, and (5) technological advancement. BOB’s core performance has seen
transformational change under the leadership of the current CMD (due for retirement in November 2012),
with strong improvement in CASA ratio, margins and productivity. The quality of earnings has improved
considerably, with RoA at ~1.3% (v/s 0.9% in FY08) and RoE at ~25% (v/s 15.8% in FY08).
Asset quality better than peers: BOB has a well diversified presence across international, retail and
domestic corporate/SME business, which leads to strong control over asset quality. GNPA ratio at 1.7%,
and PCR at 70% (83% including write-offs) are among the best in the industry. Outstanding restructured
portfolio stood at 4.2% of loans (in line with peers), of which 12.5% have slipped into the NPA category.
Superior operating performance; valuations price in positives: While performance on core operating
parameters like (1) margins, (2) CASA growth, and (3) asset quality is commendable, some of the key
earnings parameters like credit cost, margins and C/I ratio are at its best, in our view. We estimate
earnings CAGR over FY11-13 at ~10%, one of the lowest among peers. Maintain Neutral.
Domestic NIM comparable to peers; best in class asset quality
Domestic NIM of ~3.4% is comparable to
peers; higher share of international loans results
in lower reported NIM. In 1QFY12, NIM
moderated by 23bp despite the benefit of capital
raising in 4QFY11.
Diversified loan portfolio, strong risk
management practices have kept BOB's
slippages and credit cost lower than peers. For
FY11, the slippage ratio was 1.08%, the lowest
in seven years except for FY09 (0.94%).
BOB has recorded a stark improvement in asset
quality in the past few years and its asset quality
remains among the best in class. Net NPAs
remain well below 0.5% levels and provision
cover is strong at 75% (~80%+ including
technical write-offs).
BOB is likely to record earnings CAGR of ~10%
over FY11-13, on the back of high base and
muted earnings growth during FY12. This
coupled with capital infused by the government
would result in lower RoE. Despite the fall, RoE
is likely to remain healthy at ~20%.
1QFY12: Sharp moderation in NIM a negative surprise
In 1QFY12, loans grew ~2% QoQ and 25%
YoY to INR2.3t, much faster than industry
growth. Domestic loans grew 24% YoY, but
remained flat QoQ. SME loans grew ~4% QoQ
to INR284b, whereas agricultural loans declined
~5% QoQ. The share of international business
stood at ~26% v/s 25% a quarter ago.
Despite rapidly rising term deposit rates, BOB's
domestic CASA ratio remained sequentially
stable at ~34%. Though growth in CASA
deposits has moderated to 17% YoY, it remains
healthy.
In 1QFY12, the reported domestic NIM
contracted sharply to 3.4% v/s 4.2% a quarter
ago. However, adjusted for one-offs in 4QFY11
(INR2.5b interest on IT refund), NIM declined
30bp QoQ. Sharp moderation in NIM, despite
INR25b of equity infusion by the government,
is a negative surprise.
In 1QFY12, slippages were INR5.8b
(annualized slippage ratio of 1% v/s 1.5% for
4QFY11 and 1.1% for FY11). Credit cost was
0.2% v/s 0.8% in 4QFY11 and 0.6% in 1QFY11.
PCR (including technical write-offs) was healthy
at 82.5% (v/s 85% a quarter ago). The bank
already has its entire portfolio under CBS for
NPA recognition.
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