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Gross delinquencies low over the last five years: BOB’s asset quality has been
holding up much better than most peers, with gross slippages of <100bps over
the last six quarters. We would like to highlight that BOB’s slippages have
remained much at <100bps, including Lehman crisis v/s peer banks, with ~1.7-
2.3% average delinquencies over the last 4-5 years. This highlights that low
delinquencies is not just a timing function but possibly better underwriting and
monitoring.
Asset book check ‐ Limited differentiators: Better underwriting? Loan book
composition, with marginally higher retail book and lower SME exposure, is
positive but does not address the big asset quality divide. BOB's exposure to
stress sectors is also in line with peers, with only marginally lower power/Infra
exposure. Anecdotal evidence does point to conservative and better
underwriting by BOB. However, we find the large asset quality divide is still
surprising.
What is the stock discounting? Low credit costs assumptions building some
premium: BOB is currently trading at par with PNB and SBI, given the
expectations on stable asset quality. Though valuations do not capture the
premium for superior asset quality, we believe consensus ROAs does build a
premium with credit costs assumptions for BOB, significantly lower at ~70-
75bps v/s 100-105bps of credit cost expectations for other PSU banks,
highlighting downside risks in case of any asset quality disappointments.
Accumulate; PT of Rs 825/share: Our Sep-12 PT of Rs825/share is based on
two-stage Gordon growth, implying 16% upside from current levels. We do not
see gross slippages for BOB inching up to industry levels in the near term and
hence, credit costs will continue to be lower in the near term. However, with
our asset book analysis not explaining the asset quality divergence meaningfully
and given high expectations on asset quality, downside risks would also be
higher and that drives our ‘Accumulate’ rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Gross delinquencies low over the last five years: BOB’s asset quality has been
holding up much better than most peers, with gross slippages of <100bps over
the last six quarters. We would like to highlight that BOB’s slippages have
remained much at <100bps, including Lehman crisis v/s peer banks, with ~1.7-
2.3% average delinquencies over the last 4-5 years. This highlights that low
delinquencies is not just a timing function but possibly better underwriting and
monitoring.
Asset book check ‐ Limited differentiators: Better underwriting? Loan book
composition, with marginally higher retail book and lower SME exposure, is
positive but does not address the big asset quality divide. BOB's exposure to
stress sectors is also in line with peers, with only marginally lower power/Infra
exposure. Anecdotal evidence does point to conservative and better
underwriting by BOB. However, we find the large asset quality divide is still
surprising.
What is the stock discounting? Low credit costs assumptions building some
premium: BOB is currently trading at par with PNB and SBI, given the
expectations on stable asset quality. Though valuations do not capture the
premium for superior asset quality, we believe consensus ROAs does build a
premium with credit costs assumptions for BOB, significantly lower at ~70-
75bps v/s 100-105bps of credit cost expectations for other PSU banks,
highlighting downside risks in case of any asset quality disappointments.
Accumulate; PT of Rs 825/share: Our Sep-12 PT of Rs825/share is based on
two-stage Gordon growth, implying 16% upside from current levels. We do not
see gross slippages for BOB inching up to industry levels in the near term and
hence, credit costs will continue to be lower in the near term. However, with
our asset book analysis not explaining the asset quality divergence meaningfully
and given high expectations on asset quality, downside risks would also be
higher and that drives our ‘Accumulate’ rating.
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