Results above expectation; improving asset quality
The bank reported good results for Q2FY13 with control over slippages, improving provision coverage ratio and reducing bulk deposits. In a challenging environment, the bank has been able to post good results backed by an improvement in asset quality which is encouraging. We believe that an improvement in the economic scenario will lead to an improvement in the bank’s performance as well; albeit at a faster pace.
Earlier, the bank had witnessed significant deterioration in the asset quality. However, going forward, with a significant improvement in the recovery efforts of the bank and control over fresh slippages, Gross NPAs have started showing an improving trend.
The new management so far been successful in bringing about a meaningful change in the banks overall performance. The determination to deliver what has been committed makes it stand apart from other PSU banks. Management has identified some focus areas which includes focus on retail portfolio, improving CASA ratio and thereby improving the NIMs, improving the asset quality of the bank with focus on recoveries.
Going forward, we believe that all such efforts will lead to an improvement in the bank’s overall performance. However, we remain concerned about the expected restructuring (~Rs 2500 cr) in Q3FY13. Nevertheless, given the improvement in the bank’s earnings and the structural improvements in the balance sheet, we expect the bank’s profitability to grow at 23.1% CAGR over FY12-FY14E.
At CMP, the stock is trading at 0.9x and 0.79x FY13E and FY14E Adj BVPS and 6.66x and 5.21x FY13E and FY14E EPS respectively. We recommend to HOLD the stock and BUY at dips with a target price of Rs 351 (0.9x FY14E BV) indicating potential upside of 13.7% from current levels. NIM for the quarter stood at 2.79%, being 15 bps higher on YoY basis. Advances grew 12.7% YoY and 3.4% QoQ to Rs 117,821.4 cr driven by retail (14.5% YoY), large corporate (11.6%) & mid corporate (9.0% YoY). Gross NPA of the bank increased by 2.6% QoQ to Rs 3465.6 cr whereas net NPA increased by 3.8% QoQ to Rs 2393.4 cr. Gross NPA ratio stood at 2.92% while Net NPA ratio stood at 2.04%. The bank added Rs 529 cr to its restructured book of which Rs 329 cr was fresh addition and balance Rs 200 cr was Rs 200 cr was extension of working capital loan to existing accounts. The total restructured book stands at Rs 11,483 cr (9.8% of total advance book)- one of the highest in the industry Tax rate during the quarter came in higher at 35%. Management maintained its Tax rate guidance of 20% as it highlighted that higher tax in Q2 is due to the buffer being created. Capital adequacy ratio stands at 12.06% with Tier 1 ratio at 9.7%
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