1. ING VYSYA BANK: Quality growth; Attractive valuation; Buy with target price of Rs475, 26% upside
ING Vysya Bank (VYSB IN; Mkt Cap USD1b, CMP Rs378, Buy) is turning around rapidly with RoA improving from -0.3% in FY05 to 0.7% in FY10 (despite higher credit cost) and further to 1% by FY12E. As legacy issues subside, we believe IVB is all set to accelerate loan growth and improve market share. We expect earnings CAGR of 33% over FY10-13E on the back of improving loan growth, stable margins, operating leverage and lower credit cost. We expect RoE to improve ~17% by FY13.
- Growth to resume with focus on quality: IVB's growth over the last decade was lower than industry as it focused on restructuring its balance sheet, and raising employee and branch profitability. Now, with systems and processes in line with large private sector banks, IVB is focusing on growing high yielding retail and SME loans (its key expertise). As risk appetite resumes and legacy issues subside, we expect IVB to report FY10-13 loan CAGR of 24% (higher than 20% for the industry) to be driven by core retail liabilities. We expect stable 33% CASA ratio through FY13.
- Operating leverage to boost RoA: IVB's focus on raising branch and employee productivity is leading to improvement in cost to core income (C/I) ratio and RoA. Productivity has improved in the last 3-4 years, but remains lower than peers. We believe there exists significant opportunity for further improving branch and employee profitability, leading to operating leverage. By FY13, we expect Cost to Core income ratio to improve to 56% (vs 63% in FY10, 85% in FY06) and cost to average assets to 2.28% (vs 2.46% in FY10 and 3.23% in FY06).
- Fall in credit cost to drive earnings growth: In FY10, credit cost rose to 1.3% (vs FY04-09 average of 0.6%), led by (1) higher slippages from unsecured personal loans, (2) conservative restructuring policy, and (3) improving coverage ratio. We expect credit cost to fall to 1% in FY11 and 0.8% in FY12 on the back of lower unsecured personal loans and improved economic scenario.
- Earning CAGR of 33%, attractive valuation; Buy with target price of Rs475: Over FY10-13, we expect core operating profits CAGR of 26% and EPS CAGR of 33% on the back of (1) strong loan growth, (2) stable margins, (3) operating leverage, and (4) lower credit cost. RoA is expected to improve from 0.7% in FY10 to ~1% by FY13 and RoE from 11.6% in FY10 to ~17% by FY13. IVB trades at 11x FY12 EPS of Rs35, and 1.6x FY12 BV of Rs238. High growth coupled with improving return ratios will lead to re-rating. We initiate coverage with a Buy rating and a target price of Rs475 (2x P/BV FY12), an upside of 26%.
2. OBC: Met management; Business growth remains strong; NIMs to remain at ~3%; Buy
Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com)
We interacted with the management of OBC (OBC IN, Mkt Cap US$2.5b, CMP Rs459, Buy) for insights about the bank's performance. Management remains confident of achieving 22-23% business growth, RoA of 1% and RoE of 20-21%. Key highlights:
- Loan growth remains strong; confident of achieving 22%+ business growth in FY11. Retail and SME will be key loan growth drivers.
- Remains confident of maintaining margins at 3%+ despite sharp rise in interest rates and higher proportion of liabilities getting repriced in one year.
- No negative surprise expected on asset quality and slippages expected to remain within manageable levels.
- RoA to improve to 1% (0.9% in FY10) and RoE to 20-21% from ~17% in FY10. We model in RoA of ~1% and RoE of ~19% in FY11-12.
Loan growth to remain strong
- In absolute terms, while systemic loan book has remained largely flat over Jun-10, OBC is witnessing strong traction despite Rs10-12b of repayments of loans which were under base rate. Bank expects 20%+ loan growth in 1HFY11 driven by SME and retail segment.
- Bank remains confident of achieving 22% loan growth and 23% deposits growth in FY11, expecting strong pick-up in loan demand post monsoon. Pick-up in capex activities and higher demand for busy season working capital would result in better loan growth.
- On the liability side, CASA remains a key focus area. The bank expects to improve CASA ratio by 100bp every year reaching ~28% by end of FY11, which in our view is an ambitious target.
- Overall, we model in 21% loan growth, 22% deposits growth and 24% CASA ratio in our estimates.
Business growth will remain 20%+ Strengthening CASA mix (%): However, ~28% is an ambitious target in our view
ALM mismatch raises concerns, but management confident of sustaining NIMs
- Based on FY10 annual report disclosures, 71% of deposits are maturing in FY11 compared to 45% of loans. Further 73% of borrowings are also maturing in FY11.
- Given the current volatile liquidity scenario and rising rate trend, we believe margins can come under pressure in 2HFY11. Bulk deposit rates are already up 250bp YTD and retail term deposit rates have increased 100-150bp across maturities.
- However, as per management, mismatch is not a worrying factor and is part of normal business trend. In line with rising rates, OBC is witnessing pressure on cost of deposits and expects increase of 30-40bp during 2QFY11. However, to offset this, it has raised its BPLR by 50bp. With 78% of loans linked to BPLR, impact on NIMs would be positive.
- Although OBC has guided for NIMs of 2.8-3% for FY11, management states that it is being conservative and that its internal target for NIMs is at a higher level.
Percentage of deposits to be re-priced within one year (as on Mar-10) Quarterly trend in NIMs (%)
Excess provisions provides cushion to profits
- Management expects slippages to remain in a comfortable range and doesn't expect any negative surprises on asset quality.
- OBC is yet to recognize Rs1.1b of amount outstanding under agri-debt relief scheme as NPAs. However, it is carrying Rs1b provisions towards these accounts (provided in 3QFY10).
- OBC has estimated liability of ~Rs5-6b towards pension related benefits. However, it has provision of Rs2.2b being excess amount provided towards wage arrears. The accounting of pension liabilities is yet to be finalized, but given excess provision with OBC, it is in a relatively better position.
- OBC has 20% of its investments in AFS category with duration of 3.25 years. This portfolio is protected against interest rate rising upto 8%.
Asset quality continues to remain robust However, restructured book is relatively high
Valuation and view
- OBC has done well over the last 4-5 quarters in terms of improving its operating parameters led by improving margins (due to comfortable liquidity situation in the system) and strong fee income growth.
- The management focus remains to grow in line with industry and continue to strengthen its liability franchise. It has utilized its strong operating profits to build cushion against any negative shock.
- We expect the bank to report PAT CAGR of 25% over FY10-12. EPS for FY11 is expected to be Rs58 and for FY12 Rs71. BV will be Rs338 in FY11 and Rs394 in FY12. ABV will be Rs313 in FY11 and Rs366 in FY12. RoAs would improve to ~1% and ROEs would be ~19% in FY11-12.
- Maintain Buy with target price of Rs510 (1.3x PBV FY12).
OBC: Financial & valuation summary
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Thanks & Regards,
Abhishek Kothari
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