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Action: Initiate coverage with a BUY and TP of INR950
We recommend a Buy on BOB for its relatively small impaired book, high
provision cover, good capital base and attractive valuations, despite
factoring in aggressive LLPs.
Factoring in LLPs of 80bps for FY12-13F versus 23bps in 1QFY12
BOB has a relatively cleaner book amongst the large PSU banks, with a
NNPL of 0.44% and a gross provision cover of 82.5% in 1QFY12. Its
restructured loan book is relatively small at 3% with LLP at 23bps as of
1QFY12. We factor in conservative LLPs of 70-80bps for FY12-13F for
possible slippages in its power sector loan book. We expect 1.3% of
BOB’s loan book to be restructured due to bottlenecks troubling the power
sector. We believe our LLPs adequately price in this risk.
Marginal NIM improvement on loan book repricing; well capitalized
for growth
BOB’s robust CASA per branch growth of 18% and increased lending rate
of 125bps versus a deposit cost increase of 50bps should help expand its
margin from 2.87% as of 1QFY12 to 3% by FY12F. With a tier-1 ratio of
9.1%, BOB is well funded for growth for the next two years, in our view.
Valuation/catalysts: Trading at 1x P/ABV FY13E
BOB trades at 1x FY13F ABV of INR705.37 and 5.5x FY13F EPS of
INR130.10. At our TP of INR950, BOB would trade at 1.35x FY13F ABV
and 7.3x FY13F EPS for an ROA of 1.08% and ROE of 19.9%.Catalysts:
Easing rate cycle and accelerated power sector reforms.
Valuation
Initiate with BUY; TP of INR950
We expect BOB to grow its loan book at a CAGR of 19.3% over FY11-13. We expect this
to drive a revenue and PAT CAGR of 22% and 21% respectively over this period after
factoring in flat margins of 3%. We expect BOB to record ROA and adjusted ROE of
1.08% and 19.9% respectively for FY13. BOB currently trades around its historical mean
at 1x FY13E ABV. At our TP of 950, the implied P/ABV for FY13E is 1.35x. We have
arrived at our target price of INR950 using a three-stage residual-income valuation
method that uses the following assumptions:
• We estimate loan book growth of 18.8% and 19.7% for FY12 and FY13, versus
management guidance of 18-20% over FY12-13.
• We expect fee income to grow at 24% in FY12 and by 20.6% in FY13.
• We expect NIM to stay flat at 3% for FY12 and FY13 compared to 2.9% for 1QFY12.
Management has indicated that 3-3.2% is a sustainable range for interest spreads.
• On the bad loan front, we are building in an increase in GNPLs to INR62.6bn (1.9% of
loan book) by FY13 from the INR31.5bn in FY11. We’re also taking NNPLs to
INR17.3bn for FY13 from INR7.9bn in FY11 with corresponding P&L provisions of
INR45.3bn and INR23.6bn respectively.
• BOB currently has a capital adequacy ratio of 13.1% with about 9.06% in tier-1. We are
not building any dilution from capital raising into our model.
• BOB currently has an employee count of 39,385 in FY11 and we expect an addition of
9,720 new employees by FY13. We expect the cost-income ratio to be at 39.6% in
FY13 from 39.9% in FY11. We expect the cost-asset ratio to stay flat at 1.45% for FY13
from current levels.
• We expect a pro forma diluted EPS of INR116.4 for FY12 and 130.1 for FY13. At
INR950 1.1x our FY13E ABV and 5.8x our FY13E diluted EPS, we believe the stock
looks attractive. Our target price of INR950 implies 1.35x our FY13 adjusted BV
(adjusted ROE of 19.9% for FY13E) and 7.3x our FY13E EPS.
Key catalysts: Accelerated monetary policy easing, policy intervention to resolve power
sector bottlenecks, such as fuel availability and SEB (state electricity board) financial
health are the key upside catalysts.
Key risks: RBI persisting with a tight monetary policy, policy logjam with respect to
power sector bottlenecks and continued global macro uncertainty. The impending
management change in H2FY13 needs to be watched as PSU banks could experience
big write-offs after key management changes.
Residual income valuation
• We expect BOB to post a 20.3% CAGR for its average interest-earning assets over
FY11-14, compared to an industry average of 17% in our forecasts. We expect this to
be followed by a CAGR of 11.7% in FY14-20 and a terminal growth rate of 4% beyond
that.
• We have modeled for average ROE of 16.7% over FY12-20 and a 13.1% terminal
value ROE. Our discount rates range from 14.7% (current cost of equity) for FY11-14,
12.3% for FY14-20 and 10% terminal rate.
• Our book value estimates don’t factor any equity dilution
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Action: Initiate coverage with a BUY and TP of INR950
We recommend a Buy on BOB for its relatively small impaired book, high
provision cover, good capital base and attractive valuations, despite
factoring in aggressive LLPs.
Factoring in LLPs of 80bps for FY12-13F versus 23bps in 1QFY12
BOB has a relatively cleaner book amongst the large PSU banks, with a
NNPL of 0.44% and a gross provision cover of 82.5% in 1QFY12. Its
restructured loan book is relatively small at 3% with LLP at 23bps as of
1QFY12. We factor in conservative LLPs of 70-80bps for FY12-13F for
possible slippages in its power sector loan book. We expect 1.3% of
BOB’s loan book to be restructured due to bottlenecks troubling the power
sector. We believe our LLPs adequately price in this risk.
Marginal NIM improvement on loan book repricing; well capitalized
for growth
BOB’s robust CASA per branch growth of 18% and increased lending rate
of 125bps versus a deposit cost increase of 50bps should help expand its
margin from 2.87% as of 1QFY12 to 3% by FY12F. With a tier-1 ratio of
9.1%, BOB is well funded for growth for the next two years, in our view.
Valuation/catalysts: Trading at 1x P/ABV FY13E
BOB trades at 1x FY13F ABV of INR705.37 and 5.5x FY13F EPS of
INR130.10. At our TP of INR950, BOB would trade at 1.35x FY13F ABV
and 7.3x FY13F EPS for an ROA of 1.08% and ROE of 19.9%.Catalysts:
Easing rate cycle and accelerated power sector reforms.
Valuation
Initiate with BUY; TP of INR950
We expect BOB to grow its loan book at a CAGR of 19.3% over FY11-13. We expect this
to drive a revenue and PAT CAGR of 22% and 21% respectively over this period after
factoring in flat margins of 3%. We expect BOB to record ROA and adjusted ROE of
1.08% and 19.9% respectively for FY13. BOB currently trades around its historical mean
at 1x FY13E ABV. At our TP of 950, the implied P/ABV for FY13E is 1.35x. We have
arrived at our target price of INR950 using a three-stage residual-income valuation
method that uses the following assumptions:
• We estimate loan book growth of 18.8% and 19.7% for FY12 and FY13, versus
management guidance of 18-20% over FY12-13.
• We expect fee income to grow at 24% in FY12 and by 20.6% in FY13.
• We expect NIM to stay flat at 3% for FY12 and FY13 compared to 2.9% for 1QFY12.
Management has indicated that 3-3.2% is a sustainable range for interest spreads.
• On the bad loan front, we are building in an increase in GNPLs to INR62.6bn (1.9% of
loan book) by FY13 from the INR31.5bn in FY11. We’re also taking NNPLs to
INR17.3bn for FY13 from INR7.9bn in FY11 with corresponding P&L provisions of
INR45.3bn and INR23.6bn respectively.
• BOB currently has a capital adequacy ratio of 13.1% with about 9.06% in tier-1. We are
not building any dilution from capital raising into our model.
• BOB currently has an employee count of 39,385 in FY11 and we expect an addition of
9,720 new employees by FY13. We expect the cost-income ratio to be at 39.6% in
FY13 from 39.9% in FY11. We expect the cost-asset ratio to stay flat at 1.45% for FY13
from current levels.
• We expect a pro forma diluted EPS of INR116.4 for FY12 and 130.1 for FY13. At
INR950 1.1x our FY13E ABV and 5.8x our FY13E diluted EPS, we believe the stock
looks attractive. Our target price of INR950 implies 1.35x our FY13 adjusted BV
(adjusted ROE of 19.9% for FY13E) and 7.3x our FY13E EPS.
Key catalysts: Accelerated monetary policy easing, policy intervention to resolve power
sector bottlenecks, such as fuel availability and SEB (state electricity board) financial
health are the key upside catalysts.
Key risks: RBI persisting with a tight monetary policy, policy logjam with respect to
power sector bottlenecks and continued global macro uncertainty. The impending
management change in H2FY13 needs to be watched as PSU banks could experience
big write-offs after key management changes.
Residual income valuation
• We expect BOB to post a 20.3% CAGR for its average interest-earning assets over
FY11-14, compared to an industry average of 17% in our forecasts. We expect this to
be followed by a CAGR of 11.7% in FY14-20 and a terminal growth rate of 4% beyond
that.
• We have modeled for average ROE of 16.7% over FY12-20 and a 13.1% terminal
value ROE. Our discount rates range from 14.7% (current cost of equity) for FY11-14,
12.3% for FY14-20 and 10% terminal rate.
• Our book value estimates don’t factor any equity dilution
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