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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Summary
Interest rate peaked - We believe that RBI will pause in its interest rate increases this month in order to balance the objectives of maintaining growth of economy with controlling inflation. Both the local and global macroeconomic environments have turned considerably bad which should lead the RBI into considering the pause very seriously. This should result in considerably better sentiments on the banks’ overall performance and stock prices. However a 25bps, will not change any assumption in our models.
NIMS should stabilize from 4QFY12 – We believe as the 1 year deposit bucket starts maturing from 3Q onwards, the NIMs for the bank will start stabilizing on the back of revised BPLR and base rate and non repricing of maturing liabilities.
Other income PNB and BoB fares better than others - PNB and BoB have a clear advantage here over BoI and UNBK as their core fee income growth was more in line with their credit growth.
Operating leverage to continue - PSU banks have improved their cost-income ratio (CI ratio) and cost-average asset ratio (CA ratio) over the last decade. Our analysis show concerns on lingering pension provisioning are overdone. As 3 new employees will be comparable to one retiring employees, we believe operating leverage will continue.
Credit growth to be slow over FY2012-13E - Higher interest rates, stress in key sectors impacting investments, slowdown in retail credit and government policy logjam have impacted overall credit growth expectations. We believe credit growth to be within 16-18% YoY. However, over the last 10-years and especially since 2008, BoB and PNB have grown faster and managed their credit quality better relative to the system.
MTM risk - should be transitory BoI and PNB remains vulnerable - Valuation of PSU banks is now delinked from the yields on Government Securities. Even then 24% of book is in SLR securities at present which can help improve profitability over time, once bond yield eases. PNB and BoI are more vulnerable on their investment books due to higher portion of the book in AFS segment (22% and 37% respectively).
Valuation - On a near term increased risk environment driven valuation compression scenario, BoB and PNB clearly offer much better risk-reward performance. We also looked at longer term valuation of banks using a 3-stage DDM and set the price targets for each bank on that basis. Comparing these banks with emerging market peers, reveal their favorable position due to high RoE and fairly attractive P/B ratios. We rate BoB and PNB as “BUY” and UNBK and BoI as “HOLD”
On a more macro level, we believe the Indian banking sector remains one of the most attractive investment destinations. Even though over the last 9 months some stress have emerged on margin and credit quality, the long term structural story remains intact with possibilities of high credit growth (driven by higher GDP), which can be facilitated by the RBI by way of reducing liquidity (SLR+CRR) limits below the current level of 30%, which will free up considerable available funds which the banks will deploy in higher margin lending business. In the appendix we present why the long term structural story remains intact.
Summary
Interest rate peaked - We believe that RBI will pause in its interest rate increases this month in order to balance the objectives of maintaining growth of economy with controlling inflation. Both the local and global macroeconomic environments have turned considerably bad which should lead the RBI into considering the pause very seriously. This should result in considerably better sentiments on the banks’ overall performance and stock prices. However a 25bps, will not change any assumption in our models.
NIMS should stabilize from 4QFY12 – We believe as the 1 year deposit bucket starts maturing from 3Q onwards, the NIMs for the bank will start stabilizing on the back of revised BPLR and base rate and non repricing of maturing liabilities.
Other income PNB and BoB fares better than others - PNB and BoB have a clear advantage here over BoI and UNBK as their core fee income growth was more in line with their credit growth.
Operating leverage to continue - PSU banks have improved their cost-income ratio (CI ratio) and cost-average asset ratio (CA ratio) over the last decade. Our analysis show concerns on lingering pension provisioning are overdone. As 3 new employees will be comparable to one retiring employees, we believe operating leverage will continue.
Credit growth to be slow over FY2012-13E - Higher interest rates, stress in key sectors impacting investments, slowdown in retail credit and government policy logjam have impacted overall credit growth expectations. We believe credit growth to be within 16-18% YoY. However, over the last 10-years and especially since 2008, BoB and PNB have grown faster and managed their credit quality better relative to the system.
MTM risk - should be transitory BoI and PNB remains vulnerable - Valuation of PSU banks is now delinked from the yields on Government Securities. Even then 24% of book is in SLR securities at present which can help improve profitability over time, once bond yield eases. PNB and BoI are more vulnerable on their investment books due to higher portion of the book in AFS segment (22% and 37% respectively).
Valuation - On a near term increased risk environment driven valuation compression scenario, BoB and PNB clearly offer much better risk-reward performance. We also looked at longer term valuation of banks using a 3-stage DDM and set the price targets for each bank on that basis. Comparing these banks with emerging market peers, reveal their favorable position due to high RoE and fairly attractive P/B ratios. We rate BoB and PNB as “BUY” and UNBK and BoI as “HOLD”
On a more macro level, we believe the Indian banking sector remains one of the most attractive investment destinations. Even though over the last 9 months some stress have emerged on margin and credit quality, the long term structural story remains intact with possibilities of high credit growth (driven by higher GDP), which can be facilitated by the RBI by way of reducing liquidity (SLR+CRR) limits below the current level of 30%, which will free up considerable available funds which the banks will deploy in higher margin lending business. In the appendix we present why the long term structural story remains intact.
Summary of our recommendations
Bank of Baroda (BOB) – We initiate coverage with a “BUY” rating and based on 3-stage DDM, our weighted average target price for 12-months is INR 986, an upside of 30%.
→ BoB is trading at attractive valuation of 5.5x FY13E of EPS and 1.0x of FY13E book value.
→ We forecast BoB to deliver healthy earnings CAGR of 18% over FY2012-14E, driven by better than system growth, stable margins, relatively better credit cost and improving CI ratio.
→ BoB’s asset quality is the best among peers. We estimate slippages will increase by 11% over next 2-years and the GNPL will rise to 1.9% for FY2013E. However, healthy provision coverage ratio at 82% and best capital ratio (CAR of 14.5%) among peers makes it our top pick.
→ Tier-1 capital ratio remains comfortable at 10% - we believe there will be no overhang from capital dilution on the stock.
→ Key downside risks: As global environment becomes uncertain, BoB with its highest overseas exposure (26% of o/s credit book) and limited disclosures regarding overseas investment (11% of Tier I capital, down from 31% in FY2008) might cast a shadow on stock price over the short term.
Punjab National Bank (PNB) – We initiate coverage with a “BUY” rating and based on 3-stage DDM, our weighted average target price for 12-months is INR 1,191, an upside of 24%.
→ PNB is trading at attractive valuation of 6.4x FY13E of EPS and 1.1x of FY13E book value.
→ We forecast PNB to deliver healthy earnings CAGR of 21% over FY2012-14E, driven by better than system growth, stable margins (best in class), high CASA of 40% and improving CI ratio.
→ PNB’s asset quality remains weaker (than BoB) with highest restructured loan (6.5% of o/s credit). We estimate slippages will increase by 12% each over next 2-years and the GNPL will rise to 2.76% by FY2013E. However, improved provision coverage ratio along with earnings CAGR and capital ratio (CAR of 12.4%), makes it a “BUY”.
→ Tier-1 capital is border-line at 8.5% and we believe there will be a capital infusion in 2HFY13E.
→ Key downside risks: MTM risk remains highest among peers with higher exposure in AFS along with higher than expected slippages, which can affect earnings growth.
Bank of India (BoI) – We initiate coverage with a “HOLD” rating and based on 3-stage DDM, our weighted average target price for 12-months is INR 304, a downside of 9%.
→ BoI is trading at fairly attractive valuation of 6.5x FY13E of EPS and 0.8x of FY13E book value which prevented us from rating it as a “Hold” at the CMP.
→ We forecast BoI to deliver relatively poor earnings CAGR of 12% over FY2012-14E, on the back of stable margins but deteriorating credit quality impacting earnings as credit cost rise.
→ BoI’s asset quality remains doubtful even as restructured loan 3.4% of o/s credit is the second best among our coverage universe. We estimate slippages will increase by 11-28% over next 2-years, and the GNPL will rise to 2.54% by FY2013E due to exposure in Infrastructure and SME. Main worry is that the provision coverage ratio remains lowest at 67% against weakening CAR of 12.2%.
→ We have forecasted capital dilution of INR45bn in FY2012E, but it may even be difficult to raise given the GoI’s tight liquidity situation.
→ Key upside risks: If slippages are lower than our estimates and capital raise takes place at a better price than our assumption of INR 350 (already an aggressive assumption).
Union Bank of India (UNBK) – We initiate coverage with a “HOLD” rating and based on our 3 stage DDM, weighted average target price for 12-months is INR 274, a upside of 12%.
→ UNBK is trading at very attractive valuation of 5.5x FY13E of EPS and 0.8x of FY13E book value.
→ We forecast UNBK to deliver earnings CAGR of 17% over FY2012-14E, driven by stable margin and CI ratio. These factors are both positive. However we are concerned on asset quality and Tier-1 capital.
→ UNBK’s asset quality remains doubtful as restructured loan 4.0% of o/s credit remains second worst among our coverage universe. We estimate slippages will increase by only 5% over next 2-years as it already has a high base, and the GNPL will rise to 2.91% by FY2013E due to exposure in SMEs. The provision coverage ratio for UNBK remains border-line at 68% against CAR of 13%.
→ Key upside risks: If slippages are lower than our estimates and pricing power returns earlier the margins can improve above our estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Summary
Interest rate peaked - We believe that RBI will pause in its interest rate increases this month in order to balance the objectives of maintaining growth of economy with controlling inflation. Both the local and global macroeconomic environments have turned considerably bad which should lead the RBI into considering the pause very seriously. This should result in considerably better sentiments on the banks’ overall performance and stock prices. However a 25bps, will not change any assumption in our models.
NIMS should stabilize from 4QFY12 – We believe as the 1 year deposit bucket starts maturing from 3Q onwards, the NIMs for the bank will start stabilizing on the back of revised BPLR and base rate and non repricing of maturing liabilities.
Other income PNB and BoB fares better than others - PNB and BoB have a clear advantage here over BoI and UNBK as their core fee income growth was more in line with their credit growth.
Operating leverage to continue - PSU banks have improved their cost-income ratio (CI ratio) and cost-average asset ratio (CA ratio) over the last decade. Our analysis show concerns on lingering pension provisioning are overdone. As 3 new employees will be comparable to one retiring employees, we believe operating leverage will continue.
Credit growth to be slow over FY2012-13E - Higher interest rates, stress in key sectors impacting investments, slowdown in retail credit and government policy logjam have impacted overall credit growth expectations. We believe credit growth to be within 16-18% YoY. However, over the last 10-years and especially since 2008, BoB and PNB have grown faster and managed their credit quality better relative to the system.
MTM risk - should be transitory BoI and PNB remains vulnerable - Valuation of PSU banks is now delinked from the yields on Government Securities. Even then 24% of book is in SLR securities at present which can help improve profitability over time, once bond yield eases. PNB and BoI are more vulnerable on their investment books due to higher portion of the book in AFS segment (22% and 37% respectively).
Valuation - On a near term increased risk environment driven valuation compression scenario, BoB and PNB clearly offer much better risk-reward performance. We also looked at longer term valuation of banks using a 3-stage DDM and set the price targets for each bank on that basis. Comparing these banks with emerging market peers, reveal their favorable position due to high RoE and fairly attractive P/B ratios. We rate BoB and PNB as “BUY” and UNBK and BoI as “HOLD”
On a more macro level, we believe the Indian banking sector remains one of the most attractive investment destinations. Even though over the last 9 months some stress have emerged on margin and credit quality, the long term structural story remains intact with possibilities of high credit growth (driven by higher GDP), which can be facilitated by the RBI by way of reducing liquidity (SLR+CRR) limits below the current level of 30%, which will free up considerable available funds which the banks will deploy in higher margin lending business. In the appendix we present why the long term structural story remains intact.
Summary
Interest rate peaked - We believe that RBI will pause in its interest rate increases this month in order to balance the objectives of maintaining growth of economy with controlling inflation. Both the local and global macroeconomic environments have turned considerably bad which should lead the RBI into considering the pause very seriously. This should result in considerably better sentiments on the banks’ overall performance and stock prices. However a 25bps, will not change any assumption in our models.
NIMS should stabilize from 4QFY12 – We believe as the 1 year deposit bucket starts maturing from 3Q onwards, the NIMs for the bank will start stabilizing on the back of revised BPLR and base rate and non repricing of maturing liabilities.
Other income PNB and BoB fares better than others - PNB and BoB have a clear advantage here over BoI and UNBK as their core fee income growth was more in line with their credit growth.
Operating leverage to continue - PSU banks have improved their cost-income ratio (CI ratio) and cost-average asset ratio (CA ratio) over the last decade. Our analysis show concerns on lingering pension provisioning are overdone. As 3 new employees will be comparable to one retiring employees, we believe operating leverage will continue.
Credit growth to be slow over FY2012-13E - Higher interest rates, stress in key sectors impacting investments, slowdown in retail credit and government policy logjam have impacted overall credit growth expectations. We believe credit growth to be within 16-18% YoY. However, over the last 10-years and especially since 2008, BoB and PNB have grown faster and managed their credit quality better relative to the system.
MTM risk - should be transitory BoI and PNB remains vulnerable - Valuation of PSU banks is now delinked from the yields on Government Securities. Even then 24% of book is in SLR securities at present which can help improve profitability over time, once bond yield eases. PNB and BoI are more vulnerable on their investment books due to higher portion of the book in AFS segment (22% and 37% respectively).
Valuation - On a near term increased risk environment driven valuation compression scenario, BoB and PNB clearly offer much better risk-reward performance. We also looked at longer term valuation of banks using a 3-stage DDM and set the price targets for each bank on that basis. Comparing these banks with emerging market peers, reveal their favorable position due to high RoE and fairly attractive P/B ratios. We rate BoB and PNB as “BUY” and UNBK and BoI as “HOLD”
On a more macro level, we believe the Indian banking sector remains one of the most attractive investment destinations. Even though over the last 9 months some stress have emerged on margin and credit quality, the long term structural story remains intact with possibilities of high credit growth (driven by higher GDP), which can be facilitated by the RBI by way of reducing liquidity (SLR+CRR) limits below the current level of 30%, which will free up considerable available funds which the banks will deploy in higher margin lending business. In the appendix we present why the long term structural story remains intact.
Summary of our recommendations
Bank of Baroda (BOB) – We initiate coverage with a “BUY” rating and based on 3-stage DDM, our weighted average target price for 12-months is INR 986, an upside of 30%.
→ BoB is trading at attractive valuation of 5.5x FY13E of EPS and 1.0x of FY13E book value.
→ We forecast BoB to deliver healthy earnings CAGR of 18% over FY2012-14E, driven by better than system growth, stable margins, relatively better credit cost and improving CI ratio.
→ BoB’s asset quality is the best among peers. We estimate slippages will increase by 11% over next 2-years and the GNPL will rise to 1.9% for FY2013E. However, healthy provision coverage ratio at 82% and best capital ratio (CAR of 14.5%) among peers makes it our top pick.
→ Tier-1 capital ratio remains comfortable at 10% - we believe there will be no overhang from capital dilution on the stock.
→ Key downside risks: As global environment becomes uncertain, BoB with its highest overseas exposure (26% of o/s credit book) and limited disclosures regarding overseas investment (11% of Tier I capital, down from 31% in FY2008) might cast a shadow on stock price over the short term.
Punjab National Bank (PNB) – We initiate coverage with a “BUY” rating and based on 3-stage DDM, our weighted average target price for 12-months is INR 1,191, an upside of 24%.
→ PNB is trading at attractive valuation of 6.4x FY13E of EPS and 1.1x of FY13E book value.
→ We forecast PNB to deliver healthy earnings CAGR of 21% over FY2012-14E, driven by better than system growth, stable margins (best in class), high CASA of 40% and improving CI ratio.
→ PNB’s asset quality remains weaker (than BoB) with highest restructured loan (6.5% of o/s credit). We estimate slippages will increase by 12% each over next 2-years and the GNPL will rise to 2.76% by FY2013E. However, improved provision coverage ratio along with earnings CAGR and capital ratio (CAR of 12.4%), makes it a “BUY”.
→ Tier-1 capital is border-line at 8.5% and we believe there will be a capital infusion in 2HFY13E.
→ Key downside risks: MTM risk remains highest among peers with higher exposure in AFS along with higher than expected slippages, which can affect earnings growth.
Bank of India (BoI) – We initiate coverage with a “HOLD” rating and based on 3-stage DDM, our weighted average target price for 12-months is INR 304, a downside of 9%.
→ BoI is trading at fairly attractive valuation of 6.5x FY13E of EPS and 0.8x of FY13E book value which prevented us from rating it as a “Hold” at the CMP.
→ We forecast BoI to deliver relatively poor earnings CAGR of 12% over FY2012-14E, on the back of stable margins but deteriorating credit quality impacting earnings as credit cost rise.
→ BoI’s asset quality remains doubtful even as restructured loan 3.4% of o/s credit is the second best among our coverage universe. We estimate slippages will increase by 11-28% over next 2-years, and the GNPL will rise to 2.54% by FY2013E due to exposure in Infrastructure and SME. Main worry is that the provision coverage ratio remains lowest at 67% against weakening CAR of 12.2%.
→ We have forecasted capital dilution of INR45bn in FY2012E, but it may even be difficult to raise given the GoI’s tight liquidity situation.
→ Key upside risks: If slippages are lower than our estimates and capital raise takes place at a better price than our assumption of INR 350 (already an aggressive assumption).
Union Bank of India (UNBK) – We initiate coverage with a “HOLD” rating and based on our 3 stage DDM, weighted average target price for 12-months is INR 274, a upside of 12%.
→ UNBK is trading at very attractive valuation of 5.5x FY13E of EPS and 0.8x of FY13E book value.
→ We forecast UNBK to deliver earnings CAGR of 17% over FY2012-14E, driven by stable margin and CI ratio. These factors are both positive. However we are concerned on asset quality and Tier-1 capital.
→ UNBK’s asset quality remains doubtful as restructured loan 4.0% of o/s credit remains second worst among our coverage universe. We estimate slippages will increase by only 5% over next 2-years as it already has a high base, and the GNPL will rise to 2.91% by FY2013E due to exposure in SMEs. The provision coverage ratio for UNBK remains border-line at 68% against CAR of 13%.
→ Key upside risks: If slippages are lower than our estimates and pricing power returns earlier the margins can improve above our estimates.
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