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Asset quality disappoints
For 1QFY12, BOI’s net profit of Rs5.2bn (down 29% YoY) was below our
estimates. The earning miss was driven by sharp contraction in margins
and high provisions due to sharp rise in slippages. Low CASA and focus on
market share is putting pressure on NIMs, but more importantly we were
negatively surprised by the sharp rise in delinquencies. Nearly half of
slippages accrued as bank moved to system based NPL recognition and
slippages could be high in 2Q- focus is on recoveries. Infra-loans are also
facing stress that may result in asset quality pressure lasting longer. We
cut estimates by 3-5%, but see a healthy 24% Cagr over FY11-14, from
low base. Improvement in asset quality will be a key to re-rating. O-PF.
Margin pressure suppresses core earnings growth
During 1QFY12, BOI’s NII grew by just 6% YoY as a healthy loan growth of
22% was offset by 70bps YoY contraction in margins. Even on a sequential
basis margin contraction of 75bps was high. We believe that margins are
facing pressure from three areas (1) lower CASA ratio and rise in cost of term
deposits, (2) focus on market share through lower lending rates- BOI is
among the few banks that have not raised domestic lending rates in the past
one month and (3) rise in share of low-margin international loans- share of
these loans has increased from 21% last year to 25% now. While the reversal
of Rs1.8bn of interest income on NPLs negatively impacted margins, it was
offset by a similar amount of interest on income tax refund.
Slippages surprised negatively; stress in infra-loans is evident
During 1QFY12, BOI’s fresh slippages increased by 172% YoY/ 68% QoQ and
the delinquency ratio rose sharply to 3.8%. Nearly half of the fresh slippages
accrued from transition to system-based NPL recognition (largely agri-loans)
and management expects a similar amount in 2Q as well when BOI moves
the last 10% of loans (mostly small ticket agri-loans) to this system. Slippage
from restructured loans constituted another 20% of total in 1QFY12. Stress in
the infra-exposure is also evident as bank restructured some loan in power
sector and a road project loan turned NPL. Most infra-loans are lent through a
consortium and hence some other banks may also see slippages; higher
stress in infra-loans would impact earnings growth as well as valuations.
Maintain O-PF
We lower our estimates for FY12-13 by 3-5%, but still expect a healthy 24%
Cagr over FY11-14, partly due to a low base. Our revised target price of
Rs480 (earlier Rs520) is based on 1.4x FY13 adjusted PB, but improvement in
asset quality outlook is key to re-rating. Maintain O-PF.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Asset quality disappoints
For 1QFY12, BOI’s net profit of Rs5.2bn (down 29% YoY) was below our
estimates. The earning miss was driven by sharp contraction in margins
and high provisions due to sharp rise in slippages. Low CASA and focus on
market share is putting pressure on NIMs, but more importantly we were
negatively surprised by the sharp rise in delinquencies. Nearly half of
slippages accrued as bank moved to system based NPL recognition and
slippages could be high in 2Q- focus is on recoveries. Infra-loans are also
facing stress that may result in asset quality pressure lasting longer. We
cut estimates by 3-5%, but see a healthy 24% Cagr over FY11-14, from
low base. Improvement in asset quality will be a key to re-rating. O-PF.
Margin pressure suppresses core earnings growth
During 1QFY12, BOI’s NII grew by just 6% YoY as a healthy loan growth of
22% was offset by 70bps YoY contraction in margins. Even on a sequential
basis margin contraction of 75bps was high. We believe that margins are
facing pressure from three areas (1) lower CASA ratio and rise in cost of term
deposits, (2) focus on market share through lower lending rates- BOI is
among the few banks that have not raised domestic lending rates in the past
one month and (3) rise in share of low-margin international loans- share of
these loans has increased from 21% last year to 25% now. While the reversal
of Rs1.8bn of interest income on NPLs negatively impacted margins, it was
offset by a similar amount of interest on income tax refund.
Slippages surprised negatively; stress in infra-loans is evident
During 1QFY12, BOI’s fresh slippages increased by 172% YoY/ 68% QoQ and
the delinquency ratio rose sharply to 3.8%. Nearly half of the fresh slippages
accrued from transition to system-based NPL recognition (largely agri-loans)
and management expects a similar amount in 2Q as well when BOI moves
the last 10% of loans (mostly small ticket agri-loans) to this system. Slippage
from restructured loans constituted another 20% of total in 1QFY12. Stress in
the infra-exposure is also evident as bank restructured some loan in power
sector and a road project loan turned NPL. Most infra-loans are lent through a
consortium and hence some other banks may also see slippages; higher
stress in infra-loans would impact earnings growth as well as valuations.
Maintain O-PF
We lower our estimates for FY12-13 by 3-5%, but still expect a healthy 24%
Cagr over FY11-14, partly due to a low base. Our revised target price of
Rs480 (earlier Rs520) is based on 1.4x FY13 adjusted PB, but improvement in
asset quality outlook is key to re-rating. Maintain O-PF.
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