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Looking ahead. An elevated tax rate (69% of PBT), high provisions and slow revenue growth resulted in a sharp drop in earnings (68% yoy). Fresh impairments were high at 4.8% of loans led by slippages from restructured loans. Loan growth did slow but focus on international business continued, undesirably. While the performance this quarter was disappointing, our positive view is driven by possible macro improvement, healthy tier-1 ratio and inexpensive valuations. Maintain ADD (TP unchanged)
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Higher slippages and elevated tax rate leading to weak revenues and high provisions BoB reported a weak quarter, disappointing on most operating metrics. Earnings declined 68% yoy (PBT declined 24% yoy) due to higher tax rate (70% of PBT) and slower revenue growth as NII grew 7% yoy because of interest reversals on account of higher slippages and slower loan growth (12% yoy). Fresh impairments were high with slippages, primarily from the restructured loans, at 3.2% while fresh restructurings were similar to the previous quarter at 1.7% of loans. Tax rate was high at 69%, of which ~50% pertains to a provision for a claim raised by the Dubai Tax Authorities for income on loans booked in a certain region. Prima facie, it appears that a claim of this nature is unlikely to be repeated. Yet to strike a balance as the scope for improvement on balance sheet is still high Our near-term concern is on the structure of the balance sheet. Domestic loans-deposit ratio is low at 68% compared to peers and the bank could meaningfully expand NIM from current levels. The bank may need to cut its deposit rates a bit more aggressively to slow down the flow of deposits and look at deploying it aggressively. Also, there is greater focus by the bank to build the international business but we are quite surprised that the management is not looking at domestic opportunities through refinancing as the economy appears to be on a rising trend. The international business contributes ~33% of business but less than 25% of profits (gross). The importance of looking beyond the near-term performance driving our positive rating We maintain our ADD rating with TP unchanged at `210, valuing the bank at 1.2X book and 8X September 2016 EPS. We expect the bank to deliver medium-term RoEs in the range of 14-15% and earnings growth of ~35% CAGR for FY2015-17E. While we acknowledge that the performance has not been noteworthy, we believe that the improving macro outlook should broadly address the near-term concerns on impairment ratios. (1) The bank is well-capitalized with tier-1 ratio at ~9.5%, (2) is one of the few banks with a differentiated loan portfolio (international low-risk business that contributes ~30%) and has the focus to build a retail business and (3) valuations are still inexpensive, especially when one considers that the difference between reported book value and adjusted book value is greater than 15%.
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily02022015ka.pdf
Looking ahead. An elevated tax rate (69% of PBT), high provisions and slow revenue growth resulted in a sharp drop in earnings (68% yoy). Fresh impairments were high at 4.8% of loans led by slippages from restructured loans. Loan growth did slow but focus on international business continued, undesirably. While the performance this quarter was disappointing, our positive view is driven by possible macro improvement, healthy tier-1 ratio and inexpensive valuations. Maintain ADD (TP unchanged)
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
Higher slippages and elevated tax rate leading to weak revenues and high provisions BoB reported a weak quarter, disappointing on most operating metrics. Earnings declined 68% yoy (PBT declined 24% yoy) due to higher tax rate (70% of PBT) and slower revenue growth as NII grew 7% yoy because of interest reversals on account of higher slippages and slower loan growth (12% yoy). Fresh impairments were high with slippages, primarily from the restructured loans, at 3.2% while fresh restructurings were similar to the previous quarter at 1.7% of loans. Tax rate was high at 69%, of which ~50% pertains to a provision for a claim raised by the Dubai Tax Authorities for income on loans booked in a certain region. Prima facie, it appears that a claim of this nature is unlikely to be repeated. Yet to strike a balance as the scope for improvement on balance sheet is still high Our near-term concern is on the structure of the balance sheet. Domestic loans-deposit ratio is low at 68% compared to peers and the bank could meaningfully expand NIM from current levels. The bank may need to cut its deposit rates a bit more aggressively to slow down the flow of deposits and look at deploying it aggressively. Also, there is greater focus by the bank to build the international business but we are quite surprised that the management is not looking at domestic opportunities through refinancing as the economy appears to be on a rising trend. The international business contributes ~33% of business but less than 25% of profits (gross). The importance of looking beyond the near-term performance driving our positive rating We maintain our ADD rating with TP unchanged at `210, valuing the bank at 1.2X book and 8X September 2016 EPS. We expect the bank to deliver medium-term RoEs in the range of 14-15% and earnings growth of ~35% CAGR for FY2015-17E. While we acknowledge that the performance has not been noteworthy, we believe that the improving macro outlook should broadly address the near-term concerns on impairment ratios. (1) The bank is well-capitalized with tier-1 ratio at ~9.5%, (2) is one of the few banks with a differentiated loan portfolio (international low-risk business that contributes ~30%) and has the focus to build a retail business and (3) valuations are still inexpensive, especially when one considers that the difference between reported book value and adjusted book value is greater than 15%.
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily02022015ka.pdf
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