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Nomura- India Banks- Upgrading PNB to Buy SBI and BOB to Neutral NPL Accretion for Large PSU Banks Are We Getting Close to the PeakTRANSCRIPT
India banks
BANKS
EQUITY RESEARCH
Upgrading PNB to Buy; SBI and BOB to Neutral
NPL accretion for large PSU banks; are we getting close to the peak?
December 4, 2013
We see some early signs of abatement in impaired loan accretion for the larger PSU banks. Our analysis of 5 key loan-intensive sectors shows that the average size of stressed corporates doubled in the past 2 years, with persistently high interest rates a bigger determinant of stress than their operating performance. With uncertainties around interest rates ebbing and GDP growth picking up from here, we expect lower net impairment into FY15F. While we retain our preference for private sector banks given their structural advantages, we think the valuation comfort offered by some large PSUs offers interesting near-term opportunities. We highlight how improving macro, better trends in agri and retail and the recent Discom restructuring offers comfort on incremental delinquencies. As well, we analyze the interest coverage trends across 5 other key sectors: textile, metals, E&C, chemicals and food processing - that make up for 30% of incremental impairment over last two years.
Despite operating margin uptrend, high interest costs drive higher delinquencies: Our analysis of companies with ICR ratio less than 1x points to high interest rates being a key factor behind higher delinquencies despite export-driven sectors (eg, textile, metals, chemicals) showing improvement in their operating margins. The food processing sector (eg, sugar) has been hit by pricing disputes impacting supply; but we expect some resolution given its political sensitivity. Continued stress for E&C is likely until the capex cycle revives but some large restructuring done recently would ease delinquencies.
Increasing size of stressed corporates could potentially drive larger and lumpy recoveries: Average annual turnover of stressed companies rose to INR4bn from INR2bn three years ago driving up the ratio of stressed loans in the system. This implies potentially large and lumpy recoveries for the PSUs with any turn in macro.
While PNB and a few mid-size PSU banks offer valuation comfort, tight co-movement between impairment accretion and valuation for PSUs indicates strong potential for re-rating on any trend improvement.
Implication for coverage stocks: While we continue to like private sector banks over a longer horizon given their structural strengths, we believe asset quality trajectory would offer tactical opportunities into PSUs. Fig. 1: Stocks for Action
Source: Nomura estimates
Anchor themes
While we continue to prefer private sector banks given their structural strengths, we see some near term opportunities in public sector banks offering valuation comfort and early signs of improvement in impairment trends.
Nomura vs consensus
FY15F PAT for SBI, BOB and PNB are broadly in line with consensus.
Research analysts
India Banks
Abhishek Bhattacharya - NFASL [email protected] +91 22 4037 4034
Amit Nanavati - NSFSPL [email protected] +91 22 4037 4361
Company TP Target P/ABV Target P/E Rating Upside/Dow nside ROE - FY14F
PNB 625 0.63 4.9 Buy 12.4% 12.1
SBI 1,900 1.0 8.3 Neutral 4.3% 11.2
Bank of Baroda 650 0.78 5.7 Neutral -0.2% 13.4
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | India banks December 4, 2013
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Contents
3 Recent events that have made us more positive on impairment trends for PSUs
6 What does our analysis of interest coverage trends reveal?
9 How does the valuation stack up for large PSU banks?
10 Key risks to our thesis
11 Punjab National Bank
19 State Bank of
27 Bank Of Baroda
35 Appendix A-1
Nomura | India banks December 4, 2013
3
Recent events that have made us more positive on impairment trends for PSUs While NPL accretion for PSU banks was high in the Sep'13 quarter, some recent data points lead us to believe that we might be getting close to the peak of the impairment cycle:
While economic stress has not come down yet, some macro indicators appear more benign Our economist, Sonal Verma, recently upgraded her GDP growth forecast for FY14F to 4.7% from 4.2% earlier (see: Global Annual Economic Outlook: 2014 outlook: Uneven recovery drives policy divergence, 25 Nov 2013) , reiterating the view that GDP growth for India is now close to bottoming. Historically, we have seen a very tight negative fit between delinquencies (incremental addition of NPLs) to economic growth. While on the interest rate front, our house view builds in another 25bps hike in the next policy statement; it also builds in a sharp moderation in inflation going into FY15. This leads us to believe that we are likely getting close to the peak of interest rate cycle as well. Recent RBI measures have also assuaged fears on currency to a large extent with healthy inflows in FCNR deposits cushioning the balance of payments. This move also has brought down the uncertainty on rate trajectory arising out of currency related intervention by RBI.
Fig. 2: Delinquency ratio vs real GDP Growth
Source: RBI; Nomura estimates
Fig. 3: Liquidity situation has improved over last few months
Source: Nomura Research; RBI, Bloomberg
With liquidity improving for the banking system the effective policy rate has shifted closer to the repo rate than the MSF rate which has lowered incremental borrowing costs despite the 25bps hike in repo rate in the Oct'13 policy.
Trends on retail/agri NPLs have been improving gradually: Incremental GNPL data made available by RBI recently indicates that the pain might be ebbing in agri and retail loans while getting more pronounced for SME and corporate loans. Agri and retail sectors put together account for 31% of outstanding GNPL for the system (see above chart).
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Nomura | India banks December 4, 2013
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Fig. 4: GNPL Composition as of Mar'13
Source: RBI; Nomura research
Fig. 5: Net change in GNPL by sectors for all banks
Source: RBI; Nomura research
As evident in the chart above, for both agri and other priority loans (which is largely small ticket mortgage and other secured retail loans), the NPL addition trend has improved into FY13.
Fig. 6: Large PSUs -slippage, recovery and write-off trends
Source: RBI; Nomura research
Fig. 7: SBI: Rolling 12m slippage sector wise
Source: Company data; Nomura research
Recent quarterly data show recoveries and upgrades holding up while the trend of writing off bad debts aggressively has declined. Among the banks we cover, SBI and PNB also mirror this improvement in their agri and retail impairment trends, while BOB has yet to show a decline in these ratios.
Fig. 8: BOB : sector wise GNPL ratio
Source: Company data; Nomura Research
Fig. 9: PNB : change in GNPL sector wise
Source: Company data; Nomura Research
Trade/Services22%
Agri16%
Mortgage/Retail15%
Metals8%
Textiles7%
Power/other infra6%
E&C5%
Chemical/ Pharma3%
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Gems1%
Mining 1% Automobiles
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Nomura | India banks December 4, 2013
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Power sector reforms have been material on the Discom front, and recent implementation of financial restructuring plan (FRP) assuages risk of default for next two to three years With seven states now on-board the FRP programme - three already having issued the requisite bonds, cash flow visibility for the troubled Discoms is assured till FY15 at minimum. Average tariff hikes in FY14 have been lower compared to about 15-16% hike seen in FY13 largely on political considerations in an election year. However, our utilities analyst, Anirudh Gangahar, expects bigger tariff hikes in FY15 once the central elections get over. As per our estimate, most of these problem Discoms would break even at the operating level if current momentum in tariff hike continues. In the interim, FRP would provide the requisite relief of cash flows. PFC and REC have also chipped in with about INR380bn of transition financing to these Discoms towards their short term working capital requirements. However, stress on IPPs still continues with the recent development on coal linkages and tariff rulings yet to impact the ground situation. We expect the pace of restructuring on power developer side to continue well into FY15F.
Fig. 10: Losses of problem SEBs
Source: PFC state utility report, Nomura research
Fig. 11: Per unit tariff and cost increase vs realization gap
Source: PFC state utility report, Nomura research
Pace of restructuring activity still very high, although the trajectory is flattening While overall referrals in CDR continue to be high, the trajectory has come off from the highs a year ago. Even for the large PSU banks, incremental restructuring is trending flatter than a few quarters back.
Fig. 12: Rolling 12m CDR referral and approval trends
Source: CDR cell, Nomura research
Fig. 13: Live CDR cases outstanding sector wise
Source: CDR cell, Nomura research
As of Mar'13 the banking system had about INR3tn in outstanding standard restructured assets, of which INR2.1tn was in bilateral restructuring (within which INR650-700bn would be Discoms and INR500bn would be Air India. The five sectors we have analysed in more details below - textile, metals, chemical/ pharma, E&C and food processing account for about half of the outstanding CDR cases. This takes us to the key analysis
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Power & infra32%
Metals22%
Textiles10%
Chemical/Pharma8%
E&C6%
Food processing3%
Ship-Breaking3%
NBFC3%
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Hospitality2%
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Nomura | India banks December 4, 2013
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What does our analysis of interest coverage trends reveal?
Methodology: We examined interest coverage ratio (ICR) as the key metric to assess asset quality stress and classified corporates with ICR less than 1x as stressed corporates. For the five key sectors: chemicals, textiles, E&C, metals and food processing, we charted the proportion of stressed assets (as represented by their total turnover in their respective sector ; since we looked at quarterly trends ascertained from the P&Ls). We charted this stressed sales ratio with the gap between operating margin and interest cost for each sector to get some colour on the depth of stress. In addition, we separately took out the stressed corporates to compare their operating margin trends and interest cost trajectory. Finally we examine at the average ticket size of stressed assets to compare its movement across sectors.
The export-oriented sectors - textile, metals and chemicals - show continuous improvement in operating margin trends but high interest rates continue to be a dampener; any turn in rate cycle is likely to lead to reduction in slippages If interest rates turn benign we believe many of these corporates would show strong recovery with their margins already on an uptrend. The food processing sector has seen deterioration in operating trends largely on account of troubles faced by sugar mills on pricing while E&C segment has seen continued stress with no end in sight to the capex crunch.
Fig. 14: Chemicals – ratio of stressed corporates
Source: ACE equities, Nomura research
Fig. 15: Chemical – operating margin vs interest costs
Source: ACE equities, Nomura research
For the chemicals sector while the average gap between operating margins and interest costs have come off, the proportion of stressed corporates has remained high largely owing to some large corporates getting impacted by the liquidity crunch and high interest cost outflow. Orchid chemical is one case in point which has been referred to CDR with management discussing the tight liquidity and high interest costs that have impacted the company.
Fig. 16: Textiles – ratio of stressed corporates
Source: ACE equities, Nomura research
Fig. 17: Textiles – operating margin vs interest costs
Source: ACE equities, Nomura research
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Nomura | India banks December 4, 2013
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In the textiles sector again a similar trend is visible with operating margins showing an uptrend while interest costs remain very high. Some of the larger textile sector promoters have been aggressively pursued by PSU banks for recoveries. Some recent cases are Bombay Rayons- having repaid its debt to Central Bank of India in order to be removed from the wilful defaulter list (as per a news report by Financial Express).
Fig. 18: Metals – ratio of stressed corporates
Source: ACE equities, Nomura research
Fig. 19: Metals – operating margin vs interest costs
Source: ACE equities, Nomura research
In the metals sector, improvement in operating margins is most evident, with even the stressed corporates operating at positive margins. However, high interest rates have been a big dampener. Case in point is Jindal Stainless, which has seen its interest costs more than double in two years despite 20% increase in borrowings over the period.
Fig. 20: Food processing – ratio of stressed corporates
Source: ACE equities, Nomura research
Fig. 21: Food processing – operating margin vs int costs
Source: ACE equities, Nomura research
In the food processing sector - sugar continues to be a problem area with bigger corporates like Bajaj Hindustan and Balrampur Chini reporting operating losses in the recent quarter. In many mills logjam between sugarcane farmers and the mill owners on pricing has led to supply disruptions. However, with the political sensitivity of sugar and sugarcane sector, we expect some solutions to emerge soon.
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Nomura | India banks December 4, 2013
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Fig. 22: E&C – ratio of stressed corporates
Source: ACE equities, Nomura research
Fig. 23: E&C – operating margin vs interest costs
Source: ACE equities, Nomura research
E&C segment continues to show the biggest impact of the capex cycle slowdown with weak operating margin trends. However, recently some big ticket restructuring have happened in the sector - the likes of Gammon India and Lanco both of which are expected to be approved by the CDR cell in Dec quarter. While we continued stress in this sector, incremental slippages are likely to moderate with many of the bigger corporates already restructured.
Fig. 24: Avg size of stressed corporates by annual turnover
Source: ACE equities, Nomura research
Fig. 25: Int cost to sales for stressed corporates
Source: ACE equities, Nomura research
Average ticket size of stressed corporates has almost doubled in the last three years; recoveries when they come could be potentially large and lumpy As evident in the chart above the average annual turnover of stressed corporates has moved to INR4bn from INR2bn in 2QFY11. Interestingly, this coincides with the introduction of the base rate regime which has led to significant increase in borrowing costs for quite a few larger corporates. While it would be premature to see any immediate trends, but we expect strong and lumpy recoveries to come when the macro begins to turn around.
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Nomura | India banks December 4, 2013
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How does the valuation stack up for large PSU banks?
We have seen tight co-movement between valuation of PSU banks and their incremental impairment (slippages and addition in standard restructured book)
Within our coverage SBI and BOB are yet to report meaningful turn in their asset impairment trends, and are relatively richly priced. On the other hand, for PNB the turn in NPL cycle is more visible while valuation comfort is much bigger. We upgrade PNB to Buy with a TP of INR625. We also upgrade both SBI and BOB to Neutral from Reduce, but we would wait for more asset quality data points particularly on their mid-corporate loan book before turning more positive.
Fig. 26: PNB – Rolling impairments vs P/ABV
Source: Company data, Nomura estimates
Fig. 27: BOB – Rolling impairments vs P/ABV
Source: Company data, Nomura estimates
Fig. 28: SBI – Rolling impairments vs P/ABV
Source: Company data, Nomura estimates
Fig. 29: OBC – Rolling impairments vs P/ABV
Source: Company data, Bloomberg, Nomura research
Fig. 30: Canara Bank – Rolling impairments vs P/ABV
Source: Company data, Bloomberg, Nomura research
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Nomura | India banks December 4, 2013
10
Fig. 31: Union Bank – Rolling impairments vs P/ABV
Source: Company data, Bloomberg, Nomura research
Fig. 32: BOI – Rolling impairments vs P/ABV
Source: Company data, Bloomberg, Nomura research
Key risks to our thesis
• Low provision coverage for PSU banks implies stickiness in loan loss provisions even if impairments start declining rapidly.
• Low core equity ratios make PSUs dependent perennially on government for capital infusion and this is likely to have growth implication.
• Increasing trends on opex ratios - With increase in pension and wage revision provisioning, in absence of higher growth the opex ratios are likely to trend higher for PSUs.
• Ceding market share in CASA deposits and retail assets - With private sector banks gaining incremental share of CASA and retail assets like mortgage; PSU banks would continuously feel pressure on their NIMs. Some of the larger PSUs continue to enjoy a stickier retail franchise owing to their scale and reach but in the longer term they are likely to see some return erosion on account of these factors.
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Key company data: See page 2 for company data and detailed price/index chart.
Punjab National Bank PNBK.NS PNB IN
BANKS
EQUITY RESEARCH
Upgrading to Buy from Reduce
The best value proposition in the PSU bank space
December 4, 2013
Rating Up from Reduce
Buy
Target price Increased from 440 INR 625
Closing price December 2, 2013 INR 556
Potential upside +12.4%
Action: Upgrade to Buy with a new TP of INR625 We upgrade PNB to Buy with a revised TP of INR625. As highlighted in our sector note, while we think immediate relief in impairment trends is not yet visible for PSU banks, we see improvement in underlying operating margins for loan-intensive corporate, particularly in the export-driven sectors. We expect this, along with potentially a benign macro environment, to drive strong recoveries going into FY15F.We revise our H2FY14F earnings by 3% on marginally lower LLPs while building in capital infusion announced by GoI. Our TP increase is largely driven by multiple expansions from 0.44x to 0.63x 1-y Fwd BV (BVPS of INR994).
Declining impairments and valuation comfort make PNB our preferred pick in the PSU space While delinquency trends have improved marginally for PNB, recovery has been much stronger compared to other large PSUs. PNB has shown improvement in GNPL accretion across retail, agri and industry sectors. As well, with the highest exposure to Discoms among large PSUs, PNB has benefited more from the recent FRP implementation. In addition, we think PNB offers the most valuation comfort among the three PSUs in our coverage. While low provision coverage, high MTM outgo and pressure on NIMs would be dampeners, we expect this stock to be the best positioned for a re-rating once the asset quality trends start improving meaningfully.
Valuation: Our TP implies 0.63x 1-year forward ABV of INR994 and 0.93x on NNPL adjusted 1-year forward book of INR670 for an adjusted RoE of 12.1% for FY14F. At current prices, PNB looks attractive, trading at 0.56x 1-year forward ABV. Our valuation methodology remains unchanged.
31 Mar FY13 FY14F FY15F FY16F
Currency (INR) Actual Old New Old New Old New
PPOP (mn) 109,074 108,817 109,838 123,027 124,981 132,125 138,149
Reported net profit (mn) 47,477 43,533 39,021 46,749 51,511 54,442 57,992
Normalised net profit (mn) 47,477 43,533 39,021 46,749 51,511 54,442 57,992
FD normalised EPS 138.17 126.69 110.50 136.06 145.87 158.44 164.22
FD norm. EPS growth (%) -3.6 -8.3 -20.0 7.4 32.0 16.5 12.6
FD normalised P/E (x) 4.0 N/A 5.0 N/A 3.8 N/A 3.4
Price/adj. book (x) 0.6 N/A 0.6 N/A 0.5 N/A 0.5
Price/book (x) 0.6 N/A 0.6 N/A 0.5 N/A 0.5
Dividend yield (%) 5.7 N/A 4.5 N/A 6.0 N/A 6.7
ROE (%) 15.7 12.7 11.3 12.4 13.5 13.1 13.7
ROA (%) 1.0 0.9 0.8 0.8 0.9 0.8 0.9
Source: Company data, Nomura estimates
Anchor themes
While we continue to prefer private sector banks given their structural strengths, we see some near-term opportunities in public sector banks offering valuation comfort and early signs of improvement in impairment trends.
Nomura vs consensus
Our FY15F PAT is in line with consensus as we build improvement in provision cover. We expect LLPs of 100bps for FY15F.
Research analysts
India Banks
Abhishek Bhattacharya - NFASL [email protected] +91 22 4037 4034
Amit Nanavati - NSFSPL [email protected] +91 22 4037 4361
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | Punjab National Bank December 4, 2013
12
Key data on Punjab National Bank Profit and Loss (INRmn) Year-end 31 Mar FY12 FY13 FY14F FY15F FY16FInterest income 364,761 418,933 438,024 500,631 574,630Interest expense -230,617 -270,368 -277,982 -318,821 -367,057Net interest income 134,144 148,565 160,042 181,810 207,574Net fees and commissions 25,470 24,760 26,433 30,381 35,021Trading related profits 5,390 7,200 7,254 7,400 5,939Other operating revenue 11,166 10,199 9,206 11,412 11,064Non-interest income 42,026 42,159 42,893 49,194 52,023Operating income 176,170 190,724 202,935 231,004 259,597Depreciation 0 0 0 0 0Amortisation
Operating expenses -22,793 -24,903 -27,643 -31,461 -35,703Employee share expense -47,235 -56,747 -65,455 -74,562 -85,745Op. profit before provisions 106,143 109,074 109,838 124,981 138,149Provisions for bad debt -24,030 -33,360 -31,404 -37,431 -37,049Other provision charges -11,743 -10,496 -24,716 -13,963 -14,545Operating profit 70,370 65,218 53,718 73,587 86,556Other non-operating income
Associates & JCEs
Pre-tax profit 70,370 65,218 53,718 73,587 86,556Income tax -21,528 -17,741 -14,697 -22,076 -28,563Net profit after tax 48,842 47,477 39,021 51,511 57,992Minority interests
Other items
Preferred dividends
Normalised NPAT 48,842 47,477 39,021 51,511 57,992Extraordinary items 0 0 0 0 0Reported NPAT 48,842 47,477 39,021 51,511 57,992Dividends -8,594 -11,135 -9,131 -12,054 -13,570Transfer to reserves 40,248 36,342 29,890 39,457 44,422
Valuation and ratio analysis
Reported P/E (x) 3.9 4.1 5.2 3.9 3.5Normalised P/E (x) 3.9 4.1 5.2 3.9 3.5FD normalised P/E (x) 3.9 4.0 5.0 3.8 3.4FD normalised P/E at price target (x) 4.4 4.5 5.7 4.3 3.8Dividend yield (%) 4.6 5.7 4.5 6.0 6.7Price/book (x) 0.7 0.6 0.6 0.5 0.5Price/adjusted book (x) 0.7 0.6 0.6 0.5 0.5Net interest margin (%) 3.48 3.40 3.37 3.37 3.35Yield on interest earning assets (%) 9.47 9.58 9.22 9.28 9.28Cost of interest bearing liabilities (%) 6.06 6.38 6.06 6.11 6.13Net interest spread (%) 3.42 3.20 3.16 3.17 3.15Non-interest/operating income (%) 23.9 22.1 21.1 21.3 20.0Cost to income (%) 39.7 42.8 45.9 45.9 46.8Effective tax rate (%) 30.6 27.2 27.4 30.0 33.0Dividend payout (%) 17.6 23.5 23.4 23.4 23.4ROE (%) 19.8 15.7 11.3 13.5 13.7ROA (%) 1.17 1.01 0.77 0.89 0.88Operating ROE (%) 28.6 21.6 15.6 19.3 20.4Operating ROA (%) 1.68 1.39 1.06 1.27 1.31
Growth (%)
Net interest income 13.6 10.8 7.7 13.6 14.2Non-interest income 16.3 0.3 1.7 14.7 5.8Non-interest expenses 19.8 9.3 11.0 13.8 13.5Pre-provision earnings 17.2 2.8 0.7 13.8 10.5Net profit 10.2 -2.8 -17.8 32.0 12.6Normalised EPS 2.4 -6.7 -20.0 32.0 12.6Normalised FDEPS 2.0 -3.6 -20.0 32.0 12.6Source: Company data, Nomura estimates
Relative performance chart (one year)
Source: ThomsonReuters, Nomura research (%) 1M 3M 12M
Absolute (INR) -2.6 26.7 -29.2
Absolute (USD) -3.2 34.5 -38.1
Relative to MSCI India -1.2 17.4 -35.0
Market cap (USDmn) 2,834.6
Estimated free float (%) 36.6
52-week range (INR) 920/400.2
3-mth avg daily turnover (USDmn)
18.72
Major shareholders (%)
Govt. of India 58.0
Source: Thomson Reuters, Nomura research
Notes
Nomura | Punjab National Bank December 4, 2013
13
Balance Sheet (INRmn) As at 31 Mar FY12 FY13 FY14F FY15F FY16FCash and equivalents 184,332 178,255 229,847 218,624 254,747Inter-bank lending 103,351 92,491 114,834 124,243 142,317Deposits with central bank
Total securities 1,227,030 1,298,962 1,430,828 1,645,095 1,891,486Other interest earning assets
Gross loans 2,980,401 3,149,545 3,536,475 4,052,532 4,653,982Less provisions -42,654 -62,293 -58,202 -60,736 -62,897Net loans 2,937,748 3,087,252 3,478,273 3,991,796 4,591,085Long-term investments
Fixed assets 31,689 33,577 36,072 39,887 43,701Goodwill 370 370 370 370 370Other intangible assets
Other non IEAs 96,806 97,255 97,858 137,137 156,340Total assets 4,581,327 4,788,162 5,388,084 6,157,151 7,080,046Customer deposits 3,795,887 3,915,601 4,425,691 5,046,479 5,827,985Bank deposits, CDs, debentures 260,740 287,256 334,927 404,927 474,927Other interest bearing liabilities 111,903 108,953 108,953 108,953 108,953Total interest bearing liabilities 4,168,530 4,311,810 4,869,571 5,560,359 6,411,865Non interest bearing liabilities 135,242 150,191 156,375 195,197 222,164Total liabilities 4,303,772 4,462,001 5,025,946 5,755,556 6,634,029Minority interest
Common stock 3,392 3,535 3,630 3,630 3,630Preferred stock
Retained earnings 274,163 322,626 358,508 397,965 442,387Reserves for credit losses
Proposed dividends
Other equity
Shareholders' equity 277,555 326,161 362,138 401,595 446,017Total liabilities and equity 4,581,327 4,788,162 5,388,084 6,157,151 7,080,046Non-performing assets (INR) 87,196 134,658 176,263 177,299 172,638
Balance sheet ratios (%)
Loans to deposits 78.5 80.4 79.9 80.3 79.9Equity to assets 6.1 6.8 6.7 6.5 6.3
Asset quality & capital
NPAs/gross loans (%) 2.9 4.3 5.0 4.4 3.7Bad debt charge/gross loans (%) 0.81 1.06 0.89 0.92 0.80Loss reserves/assets (%) 0.93 1.30 1.08 0.99 0.89Loss reserves/NPAs (%) 48.9 46.3 33.0 34.3 36.4Tier 1 capital ratio (%) 9.3 9.8 9.7 9.4 9.1Total capital ratio (%) 12.6 12.7 12.7 12.2 11.6
Growth (%)
Loan growth 21.3 5.1 12.7 14.8 15.0Interest earning assets 24.4 4.9 12.2 14.7 15.0Interest bearing liabilities 21.0 3.4 12.9 14.2 15.3Asset growth 21.1 4.5 12.5 14.3 15.0Deposit growth 21.3 3.2 13.0 14.0 15.5
Per share
Reported EPS (INR) 144.00 134.31 107.50 141.90 159.76Norm EPS (INR) 144.00 134.31 107.50 141.90 159.76Fully diluted norm EPS (INR) 143.37 138.17 110.50 145.87 164.22DPS (INR) 25.34 31.50 25.15 33.21 37.38PPOP PS (INR) 312.94 308.58 302.59 344.30 380.58BVPS (INR) 818.31 922.73 997.63 1,106.33 1,228.71ABVPS (INR) 762.21 865.77 939.17 1,047.87 1,170.25NTAPS (INR) 817.22 921.68 996.61 1,105.31 1,227.69Source: Company data, Nomura estimates
Notes
Nomura | Punjab National Bank December 4, 2013
14
Early signs of NPL improvement seen We increase our FY14F loan growth marginally to 12.7% from 12.4% projected earlier with NIM of 3.4% (compared to 3.5% in 2QFY14). We expect marginal improvement in asset quality with fresh delinquencies of INR56bn in 2HFY14F compared to INR66bn in 1HFY14 and writebacks of INR32bn in 2HFY14F compared to INR27bn in 1HFY14. We forecast LLPs of 96bps for FY14F, with average LLPs of 88bps for 3Q and 4Q.
Our key assumption changes are: marginally higher loan growth, marginally lower NIMs (compared to 2QFY14), lower delinquency and higher writebacks (as reflected in higher GNPL ratios).
The following table summarizes our assumption changes:
• We are increasing FY14F loan growth from 12.4% to 12.7% driven by higher growth in the domestic corporate and SME segments.
• Our FY14F GNPL ratio estimate reduces from 5.7% to 5% on the back of a loan delinquency, which is revised downwards from INR56bn in 2HFY14 to INR61bn and higher write-back (recovery and upgrades) from INR17bn in 2HFY14 to INR32bn. On the back of this, our LLP estimate declines from 97bps for FY14F to 96bps.
• Due to all these changes, our FY14F PAT is revised upwards by 3.4% for 2HFY14F and our adjusted RoE estimate is revised upwards to 14.3% from 13.1% earlier for FY14F.
• We also assume capital infusion by GOI (Government of India) of INR5bn in 4QFY14F. Fig. 33: Changes in FY14F assumptions
Source: Nomura estimates
Over the past 12-18 months GNPL additions have been largely driven by corporate and services segments for PNB, while retail and agri segments have been consistently showing improving trends. While both delinquency and restructuring ratios seem to have peaked in early FY13 and have shown improving trends ever since, absolute quantum of impairments remain high. However, we believe improving operating margin trends in key stress sectors like iron & steel and textile will lead to lower impairments going forward. Also, recovery trends seem to be improving (as evident in the chart below) that might eventually bring down net delinquencies. We expect GNPL ratio to improve to 5% by FY14F from 5.2% in 2QFY14 and further to 4.4% by FY15F, driven by both improvement in delinquencies and higher levels of write-backs.
Key changes in our FY14F estimates Old NewLoan growth 12.4% 12.7%NII (INRmn) 159,121 160,042 NIM 3.37% 3.40%Non-interest income (INRmn) 42,821 42,893 Fee income (INRmn) 27,093 26,433 Investment provisions (INRmn) 4,519 11,829 Provisions for NPLs(INRmn) 31,844 31,404 LLPs 0.97% 0.96%Delinquency (INRmn) 126,945 122,287 GNPL ratio 5.68% 4.98%Provision coverage ratio 34.3% 33.0%PAT (INRmn) 43,533 39,021 Adjusted RoE 13.08% 14.28%
Nomura | Punjab National Bank December 4, 2013
15
Fig. 34: Net change in GNPL sector wise (INRbn)
Source: Company data, Nomura research
Fig. 35: Delinquency vs restructured loan addition
Source: Company data, Nomura research
Fig. 36: Recovery vs write-offs on opening GNPL
Source: Company data, Nomura research
Fig. 37: Delinquencies vs LLPs
Source: Company data, Nomura estimates
Fig. 38: Asset quality trends
Source: Company data, Nomura estimates
Over the past few quarters margins have been trending in a tight range of 3.4-3.5% despite improvement in CASA ratio from 35% levels in FY12 to 39% in 2QFY14 as the yields decline was sharper in comparison to decline in cost of funds. With systemic interest rates at elevated levels and lower CASA share for the bank, we expect NIMs to decline another 5-10bps from 2Q levels closing the year at 3.4%, while we expect CASA ratio to stay stable at current levels.
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Nomura | Punjab National Bank December 4, 2013
16
Fig. 39: Margin trend
Source: Company data, Nomura estimates
Fig. 40: CASA trends
Source: Company data, Nomura estimates
Fig. 41: RoA decomposition
Source: Company data, Nomura estimates
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CASA ratio, %
Y/E March FY09 FY10 FY11 FY12 FY13 FY14F FY15F% of Average assetsInterest Income 8.67% 7.88% 8.00% 8.72% 8.94% 8.61% 8.67%
Interest Expense 5.51% 4.76% 4.50% 5.51% 5.77% 5.46% 5.52%
Net-Interest Income 3.15% 3.12% 3.50% 3.21% 3.17% 3.15% 3.15%
Non-Interest Income 1.31% 1.33% 1.07% 1.00% 0.90% 0.84% 0.85%
Fee income 0.62% 0.62% 0.65% 0.61% 0.53% 0.52% 0.53%
Treasury 0.30% 0.30% 0.15% 0.13% 0.15% 0.14% 0.13%
Forex gains 0.13% 0.12% 0.11% 0.14% 0.12% 0.12% 0.12%
Net Income 4.46% 4.45% 4.57% 4.21% 4.07% 3.99% 4.00%
Operating Expenses 1.89% 1.75% 1.89% 1.67% 1.74% 1.83% 1.84%
Operating Profit 2.58% 2.70% 2.68% 2.54% 2.33% 2.16% 2.17%
Provisions 0.44% 0.52% 0.74% 0.86% 0.94% 1.10% 0.89%
Taxes 0.75% 0.74% 0.63% 0.51% 0.38% 0.29% 0.38%
RoA (%) 1.39% 1.44% 1.31% 1.17% 1.01% 0.77% 0.89%
Avg.assets/avg equity (x) 18.6 18.8 19.1 18.4 16.6 15.7 16.0
RoE (%) 25.85% 27.01% 25.05% 21.45% 16.78% 12.05% 14.28%
Nomura | Punjab National Bank December 4, 2013
17
Valuation methodology
We increase our TP to INR625 from INR440 and upgrade the stock to Buy as our 2HFY14F PAT increases by 3.4% and we increase our one-year forward (average FY14/15F ABV) target multiple from 0.44x earlier to 0.63x. We believe better-than-expected adjusted RoEs and potential improvement in fresh impairments and writebacks will lead to a re-rating for the stock. At the margin few sectors (as explained in the sector note) are showing improving trends which may lead to lumpy recoveries. Currently the stock trades at 2 SD below 5-year mean multiple which gives us comfort on the valuations front; in our view, any improvement in the asset quality trend will drive re-rating in PNB, which is the cheapest in our covered PSU space. In addition, PNB’s discount to State Bank of India (SBIN IN, Neutral, TP: INR1,900) is at the highest point over the last 5 years, offering us comfort on the relative valuation front..
We arrive at our TP of INR625 using a three-stage residual-income valuation method that assumes the following: 1) 11.5% CAGR for interest-earning assets over FY13-17F, 7.7% CAGR over FY17-25F and a terminal growth rate of 4%; 2) average ROE of 13.6% over FY14-17F and 12.4% over FY18-FY25F and a 6.9% terminal value ROE; and 3) discount rates ranging from 16.3% (current cost of equity) for FY14-17F, 12.5% for FY18-25F and a 10% terminal rate. At our TP, PNB should trade at 0.63x our average FY14/15F ABV of INR994 and 5x our average FY14/15F EPS of INR125 for an adjusted ROE of 12.1% for FY14F. On NNPL adjusted book, PNB should trade at 0.93x one-year forward book (fully adjusted for NNPLs) of INR670. We are building in capital infusion by Government of India (GOI) of INR5bn in 4QFY14F. Our valuation methodology remains unchanged.
Fig. 42: 1-yr Fwd PBV vs RoE
Source: Company data, Nomura estimates
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Nomura | Punjab National Bank December 4, 2013
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Fig. 43: Valuation premium/discount to SBI
Source: Company data, Bloomberg, Nomura estimates
Fig. 44: One-year forward P/ABV multiple
Source: Company data, Bloomberg, Nomura estimates
Fig. 45: One-year forward P/E multiple
Source: Company data, Bloomberg, Nomura estimates
Key risks to our thesis
• Low provision coverage for PSU banks implies stickiness in loan loss provisions even if impairments start declining rapidly.
• Low core equity ratios make PSUs dependent perennially on government for capital infusion and this is likely to have growth implications.
• Increasing trends on opex ratios: With increases in pensions and wage revision provisionings, in absence of higher growth the opex ratios are likely to trend higher for PSUs.
• Ceding market share in CASA deposits and retail assets: With private sector banks gaining incremental share of CASA and retail assets like mortgage; PSU banks are likely to continuously feel pressure on their NIMs. Some of the larger PSUs continue to enjoy a stickier retail franchise owing to their scale and reach, but in the longer term they are likely to see some return erosion on account of these factors.
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Key company data: See page 2 for company data and detailed price/index chart.
State Bank of India SBI.NS SBIN IN
BANKS
EQUITY RESEARCH
Upgrade to Neutral from Reduce
Improving trends but not out of the woods yet
December 4, 2013
Rating Up from Reduce
Neutral
Target price Increased from 1400 INR 1900
Closing price December 2, 2013 INR 1822
Potential upside +4.3%
Action: Upgrade to Neutral with revised TP of INR1,900 We upgrade SBI to Neutral and raise our TP to INR1,900 from INR1,400. As we highlight in our sector note, while immediate relief in impairment trends is not yet visible for PSU banks, we see improvement in underlying operating margins for loan-intensive corporates, particularly in export-driven sectors. We expect this, along with a potentially benign macro environment, to drive strong recoveries going into FY15F. However, for SBI, we expect another quarter or two of pain given recent management change and ongoing re-assessment of its stressed mid-corporate book. For SBI, in our view, valuation is also not that cheap, and any correction from here may present a good entry point. In comparison, we believe some of the mid-tier PSU banks offer more valuation comfort currently. We revise our FY14F earnings by 5% on slightly lower LLPs. Our TP increase is driven by our multiple expansion from 0.7x to 1x 1-year fwd ABV of INR1,610, while our ABV estimate moves up by 1%.
Catalyst: loan growth of 15.4%, NIM of 3.1%, LLP of 95bp for FY14F We raise our FY14F loan growth assumption to 15.4% from 14.2%.We expect delinquencies to remain high, averaging INR86.5bn per quarter in 2HFY14F compared to INR83.7bn in 2QFY14 with LLPs of 95bps.
Valuation: We value the core bank at INR1,575 implying 1x 1-year forward ABV of INR1,610 (1.5x on NNPL adjusted 1-year forward book of INR1,067) and we value the subsidiaries at INR325. At current prices, SBI looks fairly valued at 0.93x 1-year forward ABV for an adjusted RoE of 11.2% for FY14F. Our valuation methodology remains unchanged.
31 Mar FY13 FY14F FY15F FY16F
Currency (INR) Actual Old New Old New Old New
PPOP (mn) 310,817 300,975 305,425 336,132 353,247 390,388 403,115
Reported net profit (mn) 141,050 108,492 113,018 130,977 149,743 153,081 166,569
Normalised net profit (mn) 141,050 108,492 113,018 130,977 149,743 153,081 166,569
FD normalised EPS 209.25 158.61 164.39 191.48 215.41 223.79 239.62
FD norm. EPS growth (%) 15.8 -24.2 -21.4 20.7 31.0 16.9 11.2
FD normalised P/E (x) 8.7 N/A 11.1 N/A 8.5 N/A 7.6
Price/adj. book (x) 1.3 N/A 1.2 N/A 1.1 N/A 1.0
Price/book (x) 1.3 N/A 1.1 N/A 1.0 N/A 0.9
Dividend yield (%) 2.6 N/A 2.0 N/A 2.7 N/A 3.0
ROE (%) 15.4 10.4 10.7 11.4 12.6 12.2 12.7
ROA (%) 1.0 0.6 0.7 0.7 0.8 0.7 0.7
Source: Company data, Nomura estimates
Anchor themes
While we continue to prefer private sector banks given their structural strengths, we see some near-term opportunities in public sector banks offering valuation comfort and early signs of an improvement in impairment trends.
Nomura vs consensus
Our FY15F PAT is marginally below consensus as we build in continued asset quality pressures in the near term.
Research analysts
India Banks
Abhishek Bhattacharya - NFASL [email protected] +91 22 4037 4034
Amit Nanavati - NSFSPL [email protected] +91 22 4037 4361
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | State Bank of India December 4, 2013
20
Key data on State Bank of India Profit and Loss (INRmn) Year-end 31 Mar FY12 FY13 FY14F FY15F FY16FInterest income 1,065,215 1,196,571 1,352,279 1,537,802 1,771,152Interest expense -632,304 -753,258 -863,388 -972,494 -1,128,409Net interest income 432,911 443,313 488,891 565,308 642,742Net fees and commissions 120,909 114,837 119,802 140,458 163,812Trading related profits -9,197 10,981 15,654 4,602 5,288Other operating revenue 31,803 34,530 28,294 33,033 37,425Non-interest income 143,514 160,348 163,750 178,094 206,525Operating income 576,425 603,661 652,642 743,402 849,267Depreciation 0 0 0 0 0Amortisation
Operating expenses -95,250 -109,035 -127,067 -141,246 -161,361Employee share expense -165,440 -183,809 -220,149 -248,909 -284,791Op. profit before provisions 315,735 310,817 305,425 353,247 403,115Provisions for bad debt -115,458 -113,678 -106,537 -108,246 -130,173Other provision charges -15,444 2,370 -34,344 -21,503 -24,332Operating profit 184,833 199,509 164,545 223,497 248,610Other non-operating income
Associates & JCEs
Pre-tax profit 184,833 199,509 164,545 223,497 248,610Income tax -67,760 -58,459 -51,527 -73,754 -82,041Net profit after tax 117,073 141,050 113,018 149,743 166,569Minority interests
Other items
Preferred dividends
Normalised NPAT 117,073 141,050 113,018 149,743 166,569Extraordinary items 0 0 0 0 0Reported NPAT 117,073 141,050 113,018 149,743 166,569Dividends -26,452 -32,147 -25,599 -34,441 -38,311Transfer to reserves 90,621 108,903 87,419 115,302 128,258
Valuation and ratio analysis
Reported P/E (x) 10.1 8.7 11.1 8.5 7.6Normalised P/E (x) 10.1 8.7 11.1 8.5 7.6FD normalised P/E (x) 10.1 8.7 11.1 8.5 7.6FD normalised P/E at price target (x) 10.5 9.1 11.6 8.8 7.9Dividend yield (%) 2.2 2.6 2.0 2.7 3.0Price/book (x) 1.5 1.3 1.1 1.0 0.9Price/adjusted book (x) 1.5 1.3 1.2 1.1 1.0Net interest margin (%) 3.76 3.32 3.14 3.14 3.11Yield on interest earning assets (%) 9.25 8.97 8.68 8.55 8.57Cost of interest bearing liabilities (%) 5.69 5.93 5.85 5.69 5.72Net interest spread (%) 3.56 3.04 2.83 2.86 2.85Non-interest/operating income (%) 24.9 26.6 25.1 24.0 24.3Cost to income (%) 45.2 48.5 53.2 52.5 52.5Effective tax rate (%) 36.7 29.3 31.3 33.0 33.0Dividend payout (%) 22.6 22.8 22.7 23.0 23.0ROE (%) 15.7 15.4 10.7 12.6 12.7ROA (%) 0.91 0.97 0.67 0.78 0.75Operating ROE (%) 24.8 21.8 15.5 18.8 18.9Operating ROA (%) 1.44 1.38 0.98 1.16 1.12
Growth (%)
Net interest income 33.1 2.4 10.3 15.6 13.7Non-interest income -9.3 11.7 2.1 8.8 16.0Non-interest expenses 11.6 14.5 16.5 11.2 14.2Pre-provision earnings 24.6 -1.6 -1.7 15.7 14.1Net profit 41.7 20.5 -19.9 32.5 11.2Normalised EPS 38.8 15.8 -21.4 31.0 11.2Normalised FDEPS 38.8 15.8 -21.4 31.0 11.2Source: Company data, Nomura estimates
Relative performance chart (one year)
Source: ThomsonReuters, Nomura research (%) 1M 3M 12M
Absolute (INR) -3.0 20.2 -16.0
Absolute (USD) -3.6 27.5 -26.7
Relative to MSCI India -1.6 10.9 -21.9
Market cap (USDmn) 18,623.3
Estimated free float (%) 31.9
52-week range (INR) 2551.7/1452.7
3-mth avg daily turnover (USDmn)
72.58
Major shareholders (%)
Govt of India 59.4
Source: Thomson Reuters, Nomura research
Notes
Nomura | State Bank of India December 4, 2013
21
Balance Sheet (INRmn) As at 31 Mar FY12 FY13 FY14F FY15F FY16FCash and equivalents 540,759 658,304 539,122 594,324 663,959Inter-bank lending 430,872 489,898 531,520 609,300 701,493Deposits with central bank
Total securities 3,121,976 3,509,273 4,118,216 4,667,083 5,263,043Other interest earning assets
Gross loans 8,914,365 10,748,495 12,416,163 14,368,085 16,609,731Less provisions -238,576 -292,329 -348,276 -397,226 -464,159Net loans 8,675,789 10,456,166 12,067,887 13,970,860 16,145,572Long-term investments
Fixed assets 54,665 70,050 77,603 81,103 84,603Goodwill
Other intangible assets
Other non IEAs 531,130 478,920 572,427 806,111 929,035Total assets 13,355,192 15,662,610 17,906,775 20,728,780 23,787,705Customer deposits 10,436,474 12,027,396 13,794,576 15,747,753 17,864,410Bank deposits, CDs, debentures 869,894 1,289,535 1,602,077 1,757,077 2,002,077Other interest bearing liabilities 400,162 402,292 402,292 852,292 1,252,292Total interest bearing liabilities 11,706,529 13,719,223 15,798,946 18,357,123 21,118,779Non interest bearing liabilities 809,151 954,551 975,198 1,123,724 1,292,735Total liabilities 12,515,680 14,673,774 16,774,144 19,480,847 22,411,514Minority interest
Common stock 6,710 6,840 6,951 6,951 6,951Preferred stock
Retained earnings 832,802 981,997 1,125,679 1,240,981 1,369,239Reserves for credit losses
Proposed dividends
Other equity
Shareholders' equity 839,512 988,837 1,132,631 1,247,933 1,376,191Total liabilities and equity 13,355,192 15,662,610 17,906,775 20,728,780 23,787,705Non-performing assets (INR) 396,765 511,894 709,484 786,819 850,434
Balance sheet ratios (%)
Loans to deposits 85.4 89.4 90.0 91.2 93.0Equity to assets 6.3 6.3 6.3 6.0 5.8
Asset quality & capital
NPAs/gross loans (%) 4.5 4.8 5.7 5.5 5.1Bad debt charge/gross loans (%) 1.30 1.06 0.86 0.75 0.78Loss reserves/assets (%) 1.79 1.87 1.94 1.92 1.95Loss reserves/NPAs (%) 60.1 57.1 49.1 50.5 54.6Tier 1 capital ratio (%) 9.8 9.5 9.6 9.2 8.8Total capital ratio (%) 14.5 13.5 13.2 15.8 17.3
Growth (%)
Loan growth 14.7 20.5 15.4 15.8 15.6Interest earning assets 13.1 18.2 15.7 15.1 14.9Interest bearing liabilities 11.1 17.2 15.2 16.2 15.0Asset growth 9.1 17.3 14.3 15.8 14.8Deposit growth 11.7 15.2 14.7 14.2 13.4
Per share
Reported EPS (INR) 180.71 209.25 164.39 215.41 239.62Norm EPS (INR) 180.71 209.25 164.39 215.41 239.62Fully diluted norm EPS (INR) 180.71 209.25 164.39 215.41 239.62DPS (INR) 39.42 47.00 36.82 49.54 55.11PPOP PS (INR) 487.36 461.10 444.26 508.16 579.90BVPS (INR) 1,251.05 1,445.60 1,629.34 1,795.21 1,979.72ABVPS (INR) 1,214.79 1,394.79 1,527.02 1,692.89 1,877.40NTAPS (INR) 1,251.05 1,445.60 1,629.34 1,795.21 1,979.72Source: Company data, Nomura estimates
Notes
Nomura | State Bank of India December 4, 2013
22
Tailwinds from growth, delinquencies likely to persist in H2FY14F We raise our FY14F loan growth assumption to 15.4% from 14.2% projected earlier, with a blended NIM of 3.1% (compared with 3.2% in 2QFY14). We expect delinquencies to remain elevated, averaging INR86.5bn per quarter in 2HFY14F compared with INR83.7bn in 2QFY14, while we expect a marginal improvement in writebacks (average INR38bn/quarter in 2HFY14F vs. INR33.6bn/quarter in 1H) resulting in lower LLPs of 95bps for FY14F compared with our earlier estimate of 109bps
Key changes to our assumptions
Our key assumption changes have been: higher loan growth, stable NIMs (compared with Q2FY14), better asset quality (compared with our previous expectations) leading to lower LLPs of 95bps (compared with 109bps estimated earlier).
The table below summarises our assumption changes:
• We raise our loan growth estimate higher from 14.2% to 15.4%, driven by stronger growth in the corporate segment.
• We reduce our FY14F GNPL ratio estimate from 6.2% to 5.7%, as we cut our delinquency estimate for 2HFY14F to INR173bn compared with INR184bn estimated earlier (averaging INR86.5bn/quarter compared with INR83.7bn in 2Q). In terms of write backs, we now build in INR76bn of recovery and upgrades in 2HFY14F compared with our earlier estimate of INR62.5bn. On the back of our above changes we reduce our LLP estimate to 95bps for FY14F from 109bps earlier.
• Due to all these changes, our FY14F PAT estimate increases by 4% to INR113bn with an adjusted RoE of 11.2% (10.9% earlier).
• We also assume capital infusion by the Government of India (GOI) of INR20bn in 4QFY14F.
Fig. 46: Changes to our FY14F assumptions
Source: Nomura estimates
Key changes in FY14F assumptions Old NewLoan growth 14.2% 15.4%NII (INRmn) 473,411 488,891 NIM 3.04% 3.14%Non-interest income (INRmn) 169,319 163,750 Fee income (INRmn) 121,107 119,802 Investment provisions (INRmn) 13,097 19,894 Provisions for NPLs (INRmn) 122,038 106,537 LLPs 1.09% 0.95%Delinquency (INRmn) 415,989 391,268 GNPL ratio 6.2% 5.7%Provision coverage ratio 48.3% 49.1%PAT (INRmn) 108,492 113,018 Adjusted RoE 10.89% 11.21%
Nomura | State Bank of India December 4, 2013
23
We have analysed the delinquency trends for SBI on a rolling 12-month basis. While asset quality stress persists in the corporate segment (especially the mid-corporate segment) driven by sectors such as iron & steel and food processing, the agri and retail segments are showing early signs of improvement. Recovery trends have declined over the past few quarters and higher write-offs, have been aiding improvement in headline NPL ratios. We expect fresh delinquencies to stay elevated over the next few quarters with a new management taking charge and an ongoing scrutiny of its mid-corporate exposure. This keeps us cautious on the name in the near term as we believe there is scope for more negative surprises than positives.
Fig. 47: SBI rolling 12m slippage sector-wise
Source: Company data, Nomura research
Fig. 48: Sector-wise slippage trends
Source: Company data, Nomura research
Fig. 49: Delinquency vs. restructured loan additions
Source: Company data, Nomura research
Fig. 50: Recovery vs. write-off on opening GNPLs
Source: Company data, Nomura research
Fig. 51: Delinquencies vs. LLPs
Source: Company data, Nomura estimates
Fig. 52: Asset quality trends
Source: Company data, Nomura estimates
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Delinquencies (INRmn)LLPs, % (RHS)
3.05 3.29
4.45 4.76
5.71 5.48
1.72 1.63 1.82 2.10
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Nomura | State Bank of India December 4, 2013
24
Margins have been declining for SBI over the past two years, as the bank was sacrificing yields to attract higher quality loans. With SBI still maintaining one of the lowest base rates in the system, we expect margins to stay subdued into 2HFY14F, thus taking our full-year FY14F NIM estimate to 3.14%, compared to3.21% in 2QFY14.
Fig. 53: Margin trends
Source: Company data, Nomura estimates
CASA ratio has declined from 46-47% in FY12-13 to 44% in 2QFY14, as the bank has been ceding market share in current account deposits. We do not expect any meaningful rebound in current account deposits in the near-term and expect the CASA ratio to remain at around 44% till FY15F. We expect this to limit margin expansion from current levels unless the bank takes another rate hike from here. Fig. 54: CASA ratio trends
Source: Company data, Nomura estimates
3.79
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Nomura | State Bank of India December 4, 2013
25
Fig. 55: RoA decomposition
Source: Company data, Nomura estimates
Valuation methodology and risks
We raise our TP to INR1,900 from INR1,400, as we increase our FY14F PAT by 4% and raise our one-year forward (average FY14/15F ABV) target multiple from 0.7x to 1x as we believe any likely improvement in fresh impairments and write-backs should lead to a re-rating of the stock. We do not yet see any strong signs of improvement in asset quality; however, few sectors (as explained in the sector note) are showing improving trends which may lead to lumpy recoveries into FY15F. On our target multiple, SBI would trade 1SD below the 5-year mean multiple.
We arrive at our new TP of INR1,900 using a SOTP methodology (methodology unchanged), with its subsidiaries valued at INR325 and the core bank valued at INR1,575 using a three-stage residual-income valuation method that assumes the following: 1) 14.1% CAGR for interest-earning assets over FY13-17F, 9.7% CAGR over FY17-25F and a terminal growth rate of 4%; 2) average ROE of 12.5% over FY14-17F and 12.1% over FY18-FY25F and a 11.6% terminal value ROE, and; 3) discount rates ranging from 15.7% (current cost of equity) for FY14-17F, 12.5% for FY18-25F and a 10% terminal rate. At our TP, SBI should trade at 1x our average FY14/15F ABV of INR1,610 and 8.3x our average FY14/15F EPS of INR190 for an adjusted ROE of 11.2% for FY14F. On NNPL adjusted book, SBI should trade at 1.5x one-year forward book (fully adjusted for NNPLs) of INR1,067. We are building in capital infusion by the GOI (Government of India) of INR20bn in 4QFY14F.
Y/E March FY09 FY10 FY11 FY12 FY13 FY14F FY15F% of Average assetsInterest Income 7.68% 7.04% 7.15% 8.32% 8.25% 8.06% 7.96%
Interest Expense 5.20% 4.69% 4.29% 4.94% 5.19% 5.14% 5.03%
Net-Interest Income 2.48% 2.35% 2.86% 3.38% 3.06% 2.91% 2.93%
Non-Interest Income 1.51% 1.48% 1.39% 1.12% 1.11% 0.98% 0.92%
Fee income 0.90% 0.96% 1.02% 0.94% 0.79% 0.71% 0.73%
Treasury 0.30% 0.21% 0.08% -0.07% 0.08% 0.09% 0.02%
Forex gains 0.14% 0.16% 0.13% 0.11% 0.12% 0.06% 0.07%
Net Income 3.98% 3.83% 4.25% 4.50% 4.16% 3.89% 3.85%
Operating Expenses 1.86% 2.01% 2.02% 2.04% 2.02% 2.07% 2.02%
Operating Profit 2.13% 1.82% 2.23% 2.47% 2.14% 1.82% 1.83%
Provisions 0.44% 0.44% 0.91% 1.02% 0.77% 0.84% 0.67%
Taxes 0.60% 0.47% 0.59% 0.53% 0.40% 0.31% 0.38%
RoA (%) 1.08% 0.91% 0.73% 0.91% 0.97% 0.67% 0.78%
Avg.assets/avg equity (x) 16.0 16.6 17.6 17.5 16.4 16.7 17.3
RoE (%) 17.3% 15.1% 12.7% 16.0% 15.9% 11.2% 13.4%
Nomura | State Bank of India December 4, 2013
26
Fig. 56: 1-year fwd PBV vs. RoE
Source: Company data, Bloomberg, Nomura estimates
Fig. 57: One-year forward P/ABV chart
Source: Company data, Bloomberg, Nomura estimates
Fig. 58: One-year forward P/E chart
Source: Company data, Bloomberg, Nomura estimates
Key risks to our thesis
• Low provision coverage for PSU banks implies stickiness in loan loss provisions even if impairments start declining rapidly.
• Low core equity ratios make PSUs dependent perennially on government for capital infusion and this is likely to have growth implication.
• Increasing trends on opex ratios: With increase in pension and wage revision provisioning, in absence of higher growth the opex ratios are likely to trend higher for PSUs.
• Ceding market share in CASA deposits and retail assets: With private sector banks gaining incremental share of CASA and retail assets like mortgage; PSU banks would continuously feel pressure on their NIMs. Some of the larger PSUs continue to enjoy a stickier retail franchise owing to their scale and reach but in the longer term they are likely to see some return erosion on account of these factors.
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Key company data: See page 2 for company data and detailed price/index chart.
Bank Of Baroda BOB.NS BOB IN
BANKS
EQUITY RESEARCH
Upgrade to Neutral from Reduce
Yet to show signs of a recovery; appears fully priced
December 4, 2013
Rating Up from Reduce
Neutral
Target price Increased from 420 INR 650
Closing price December 2, 2013 INR 651
Potential downside -0.2%
Action: Upgrade to Neutral with a revised TP of INR650 We raise our TP for BOB to INR650 from INR420 and upgrade to Neutral from Reduce. As highlighted in our sector note, while an immediate relief in impairment trends is not yet visible for PSU banks, we see some improvement in underlying operating margins for loan-intensive corporates, particularly in export-driven sectors. We expect this, along with potentially a benign macro environment, to drive strong recoveries going into FY15F. For BOB, we expect asset quality pain to linger for a quarter or two before declining meaningfully. As well, we think the stock appears to be fully priced and offers lower valuation comfort vs. PNB (PNB IN, Buy) and a few other mid-tier PSU banks. We raise our FY14F earnings by 13% on marginally lower LLPs. Our TP increase is driven by the increase in our estimated multiple from 0.5x to 0.78x 1-y fwd ABV of INR831, while our ABV estimate has moved up by just 2% to INR831.
Catalyst: 13.7% loan growth, 2.2% NIM and LLP of 91bp for FY14F We raise our FY14F loan growth to 13.7% from 12.3%, with blended NIM of 2.2% (vs 2.3% in 2QFY14). We expect a marginal improvement in asset quality with fresh delinquencies of INR35bn in 2HFY14F vs INR42bn in 1HFY14 and writebacks of INR9.2bn in 2HFY14F vs INR7.7bn in 1HFY14. We estimate LLPs of 91bps for FY14F with average LLPs of 98bps for 3QF and 4QF.
Valuation: At current prices, BOB looks fairly valued. Our TP implies 0.78x 1-year forward ABV of INR831 and 1x on NNPL adjusted 1-year forward book of INR642 for an adjusted RoE of 13.2% for FY14F. Our valuation methodology remains unchanged.
31 Mar FY13 FY14F FY15F FY16F
Currency (INR) Actual Old New Old New Old New
PPOP (mn) 90,738 91,377 90,998 104,459 111,227 121,260 127,527
Reported net profit (mn) 44,807 37,495 41,988 43,617 53,956 47,002 59,043
Normalised net profit (mn) 45,554 37,650 42,610 43,617 54,578 47,002 59,665
FD normalised EPS 108.14 89.38 99.16 103.54 127.01 111.58 138.85
FD norm. EPS growth (%) -12.1 -17.3 -8.3 15.8 28.1 7.8 9.3
FD normalised P/E (x) 6.0 N/A 6.6 N/A 5.1 N/A 4.7
Price/adj. book (x) 0.9 N/A 0.8 N/A 0.7 N/A 0.7
Price/book (x) 0.9 N/A 0.8 N/A 0.7 N/A 0.6
Dividend yield (%) 3.9 N/A 3.5 N/A 4.5 N/A 4.9
ROE (%) 15.1 11.1 12.2 11.7 13.8 11.6 13.6
ROA (%) 0.9 0.7 0.7 0.7 0.8 0.7 0.8
Source: Company data, Nomura estimates
Anchor themes
While we continue to prefer private sector banks given their structural strengths, we see some near-term opportunities in public sector banks offering valuation comfort and early signs of an improvement in impairment trends.
Nomura vs consensus
Our FY15F PAT is 5% above consensus as we are building in an improvement in delinquency and recovery trends.
Research analysts
India Banks
Abhishek Bhattacharya - NFASL [email protected] +91 22 4037 4034
Amit Nanavati - NSFSPL [email protected] +91 22 4037 4361
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | Bank Of Baroda December 4, 2013
28
Key data on Bank Of Baroda Profit and Loss (INRmn) Year-end 31 Mar FY12 FY13 FY14F FY15F FY16FInterest income 296,737 351,967 389,088 441,357 510,005Interest expense -193,567 -238,814 -270,399 -298,224 -345,419Net interest income 103,170 113,153 118,689 143,133 164,586Net fees and commissions 17,962 18,585 20,547 23,279 27,221Trading related profits 6,067 6,173 7,250 8,674 10,018Other operating revenue 10,195 11,549 13,964 17,435 19,931Non-interest income 34,223 36,306 41,760 49,388 57,170Operating income 137,393 149,459 160,450 192,521 221,755Depreciation 0 0 0 0 0Amortisation
Operating expenses -21,234 -24,225 -27,485 -31,814 -36,634Employee share expense -29,856 -34,497 -41,967 -49,480 -57,594Op. profit before provisions 86,304 90,738 90,998 111,227 127,527Provisions for bad debt -18,652 -34,314 -32,065 -33,579 -35,971Other provision charges -6,896 -7,365 -7,677 -4,877 -6,321Operating profit 60,756 49,059 51,256 72,771 85,235Other non-operating income
Associates & JCEs
Pre-tax profit 60,756 49,059 51,256 72,771 85,235Income tax -10,188 -3,505 -8,646 -18,193 -25,571Net profit after tax 50,567 45,554 42,610 54,578 59,665Minority interests
Other items
Preferred dividends
Normalised NPAT 50,567 45,554 42,610 54,578 59,665Extraordinary items -498 -746 -622 -622 -622Reported NPAT 50,070 44,807 41,988 53,956 59,043Dividends -8,123 -10,596 -9,825 -12,626 -13,816Transfer to reserves 41,947 34,211 32,163 41,330 45,227
Valuation and ratio analysis
Reported P/E (x) 5.1 6.1 6.7 5.2 4.7Normalised P/E (x) 5.0 6.0 6.6 5.1 4.7FD normalised P/E (x) 5.3 6.0 6.6 5.1 4.7FD normalised P/E at price target (x) 5.3 6.0 6.6 5.1 4.7Dividend yield (%) 3.0 3.9 3.5 4.5 4.9Price/book (x) 1.0 0.9 0.8 0.7 0.6Price/adjusted book (x) 1.0 0.9 0.8 0.7 0.7Net interest margin (%) 2.78 2.42 2.18 2.34 2.33Yield on interest earning assets (%) 7.98 7.53 7.14 7.21 7.21Cost of interest bearing liabilities (%) 5.26 5.25 5.16 5.06 5.07Net interest spread (%) 2.73 2.28 1.97 2.15 2.15Non-interest/operating income (%) 24.9 24.3 26.0 25.7 25.8Cost to income (%) 37.2 39.3 43.3 42.2 42.5Effective tax rate (%) 16.8 7.1 16.9 25.0 30.0Dividend payout (%) 16.2 23.6 23.4 23.4 23.4ROE (%) 20.6 15.1 12.2 13.8 13.6ROA (%) 1.24 0.90 0.73 0.84 0.79Operating ROE (%) 25.0 16.5 14.9 18.6 19.7Operating ROA (%) 1.51 0.99 0.89 1.13 1.15
Growth (%)
Net interest income 17.2 9.7 4.9 20.6 15.0Non-interest income 21.8 6.1 15.0 18.3 15.8Non-interest expenses 24.0 14.1 13.5 15.7 15.1Pre-provision earnings 23.6 5.1 0.3 22.2 14.7Net profit 19.2 -9.9 -6.5 28.1 9.3Normalised EPS 10.9 -16.2 -8.3 28.1 9.3Normalised FDEPS 5.7 -12.1 -8.3 28.1 9.3Source: Company data, Nomura estimates
Relative performance chart (one year)
Source: ThomsonReuters, Nomura research (%) 1M 3M 12M
Absolute (INR) -3.1 37.7 -14.6
Absolute (USD) -3.7 46.2 -25.5
Relative to MSCI India -1.7 28.5 -20.5
Market cap (USDmn) 4,102.0
Estimated free float (%) 36.0
52-week range (INR) 899/429.95
3-mth avg daily turnover (USDmn)
21.42
Major shareholders (%)
Govt. of India 57.0
Source: Thomson Reuters, Nomura research
Notes
Nomura | Bank Of Baroda December 4, 2013
29
Balance Sheet (INRmn) As at 31 Mar FY12 FY13 FY14F FY15F FY16FCash and equivalents 216,515 134,468 153,714 159,630 186,424Inter-bank lending 425,171 719,468 772,186 889,151 1,028,116Deposits with central bank
Total securities 832,094 1,213,937 1,185,428 1,368,694 1,580,922Other interest earning assets
Gross loans 2,902,984 3,319,763 3,786,010 4,373,101 5,056,177Less provisions -29,211 -37,906 -54,960 -71,609 -86,705Net loans 2,873,773 3,281,858 3,731,050 4,301,492 4,969,472Long-term investments
Fixed assets 23,415 24,531 27,976 38,776 49,576Goodwill
Other intangible assets
Other non IEAs 102,247 97,039 119,686 137,681 159,060Total assets 4,473,215 5,471,302 5,990,040 6,895,423 7,973,571Customer deposits 3,848,711 4,738,833 5,176,807 5,986,862 6,961,596Bank deposits, CDs, debentures 125,651 154,690 182,474 214,474 246,474Other interest bearing liabilities 110,080 111,103 113,103 113,103 113,103Total interest bearing liabilities 4,084,442 5,004,626 5,472,384 6,314,439 7,321,172Non interest bearing liabilities 114,005 147,034 147,859 169,858 196,045Total liabilities 4,198,446 5,151,660 5,620,243 6,484,296 7,517,217Minority interest
Common stock 4,124 4,225 4,310 4,310 4,310Preferred stock
Retained earnings 270,645 315,417 365,487 406,817 452,044Reserves for credit losses
Proposed dividends
Other equity
Shareholders' equity 274,769 319,642 369,797 411,127 456,354Total liabilities and equity 4,473,215 5,471,302 5,990,040 6,895,423 7,973,571Non-performing assets (INR) 44,648 79,826 127,354 161,367 191,638
Balance sheet ratios (%)
Loans to deposits 75.4 70.1 73.1 73.0 72.6Equity to assets 6.1 5.8 6.2 6.0 5.7
Asset quality & capital
NPAs/gross loans (%) 1.5 2.4 3.4 3.7 3.8Bad debt charge/gross loans (%) 0.64 1.03 0.85 0.77 0.71Loss reserves/assets (%) 0.65 0.69 0.92 1.04 1.09Loss reserves/NPAs (%) 65.4 47.5 43.2 44.4 45.2Tier 1 capital ratio (%) 10.5 10.1 10.4 10.1 9.8Total capital ratio (%) 14.6 13.3 13.7 13.1 12.4
Growth (%)
Loan growth 25.7 14.2 13.7 15.3 15.5Interest earning assets 25.1 26.2 9.1 15.3 15.5Interest bearing liabilities 24.6 22.5 9.3 15.4 15.9Asset growth 24.8 22.3 9.5 15.1 15.6Deposit growth 26.0 23.1 9.2 15.6 16.3
Per share
Reported EPS (INR) 127.84 106.37 97.71 125.56 137.40Norm EPS (INR) 129.11 108.14 99.16 127.01 138.85Fully diluted norm EPS (INR) 123.00 108.14 99.16 127.01 138.85DPS (INR) 19.76 25.15 22.86 29.38 32.15PPOP PS (INR) 220.35 215.40 211.76 258.84 296.77BVPS (INR) 668.34 758.78 860.56 956.74 1,061.98ABVPS (INR) 622.84 709.25 782.93 879.11 984.36NTAPS (INR) 668.34 758.78 860.56 956.74 1,061.98Source: Company data, Nomura estimates
Notes
Nomura | Bank Of Baroda December 4, 2013
30
Expect in-line industry loan growth with a marginal improvement in delinquencies with stronger recovery We increase our FY14F loan growth to 13.7% from 12.3% projected earlier, with blended NIM estimate of 2.2% (vs 2.3% in 2QFY14). We expect a marginal improvement in the asset quality with fresh delinquencies of INR35bn in 2HFY14F compared with INR42bn in 1HFY14 and writebacks of INR9.2bn in 2HFY14F vs INR7.7bn in 1HFY14. We estimate LLPs of 91bps for FY14F with average LLPs of 98bps for 3QF and 4QF.
Our key assumption changes are: marginally higher loan growth, lower delinquency and higher write-backs (as reflected in lower GNPL ratios).
The following table summarizes our assumption changes:
• We increase our FY14F loan growth from 12.3% to 13.7% driven by higher growth in domestic corporate and SME segments.
• Our FY14F GNPL ratio estimate reduces from 3.8% to 3.4% on the back of a loan delinquency estimate which is lowered from our earlier estimate of INR44bn for 2HFY14F to INR35bn and higher write-back (recovery and upgrades) from our earlier estimate of INR7.3bn in 2HFY14 to INR9.1bn. On the back of this, we reduce our LLP estimate from 100bps for FY14F to 91bps.
• Due to all these changes, we raise our FY14F PAT by 13% to INR43bn and our adjusted RoE to 13.4% from 12%.
• We also assume capital infusion by the government of India (GOI) of INR5.5bn in 4QFY14F.
Fig. 59: Changes in our FY14F assumptions
Source: Nomura estimates
Key FY14F estimate changes Old NewLoan growth 12.3% 13.7%NII (INRmn) 120,370 118,689 NIM 2.23% 2.19%Non-interest income (INRmn) 40,414 41,760 Fee income (INRmn) 19,027 20,547 Investment provisions (INRmn) 3,807 2,233 Provisions for NPLs (INRmn) 34,998 32,065 LLPs 1.00% 0.91%Delinquency (INRmn) 87,775 77,207 GNPL ratio 3.8% 3.4%Provision coverage ratio 43.9% 43.2%PAT (INRmn) 37,650 42,610 Adjusted RoE 12.02% 13.42%
Nomura | Bank Of Baroda December 4, 2013
31
The GNPL ratio for BOB has been worsening across all the segments with no signs of improvement. The delinquency ratio has been inching up steadily and recovery trends have been declining. While we don’t see impairment trends improving significantly, we believe recovery and upgrade may positively surprise with a marginal decline in delinquencies. We build in a GNPL ratio of 3.4% for FY14F vs. 3.2% in 2QFY14.
Fig. 60: Sector-wise GNPL ratio
Source: Company data, Nomura research
Fig. 61: Delinquency vs. restructured loan addition
Source: Company data, Nomura research
Fig. 62: Recovery vs. write-offs on opening GNPL
Source: Company data, Nomura research
Fig. 63: Delinquencies vs. LLPs
Source: Company data, Nomura estimates
Fig. 64: Asset quality trends
Source: Company data, Nomura estimates
-
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Large corp SME Agri Retail
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LLPs, % (RHS)
1.36 1.36 1.54
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Gross NPA, %Net NPA, %Provision cover (inverse scale - RHS)
Nomura | Bank Of Baroda December 4, 2013
32
Margins have been consistently on a declining trend for BOB for the past six quarters from 3% levels in 4QFY12 to 2.3% in 2QFY4. This was on account of the sharp decline in international margins and higher mix of international loans in total loans. Domestic NIMs also compressed on declining yields. We budget in NIMs of 2.2% for FY14F and an improvement thereon to 2.35% for FY15F.
Fig. 65: Margin trends
Source: Company data, Nomura estimates
Fig. 66: CASA ratio trends
Source: Company data, Nomura estimates
2.87
3.07
2.992.96
2.73 2.712.65
2.51
2.41
2.32
2.19
2.35
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NIM, %
27.9
27.4 27.2
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25.3 25.3
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Nomura | Bank Of Baroda December 4, 2013
33
Fig. 67: RoA decomposition
Source: Company data, Nomura estimates
Valuation methodology
We increase our TP to INR650 from INR420 and upgrade the stock to Neutral as our FY14F PAT rises by 13% and we increase our one-year forward (average FY14/15F ABV) target multiple from 0.5x earlier to 0.78x as we believe better-than-expected adjusted RoEs and any likely improvement in fresh impairments and write-backs will lead to a re-rating of the stock driven by a higher multiple. While we don’t see any strong signals of improvement in asset quality, few sectors (as explained in the sector note) are showing improving trends, which may lead to lumpy recoveries. As well, on a relative valuation basis, BOB currently shows the lowest premium gap with SBI (as shown below). On our target multiple, BOB would trade 1SD below the five-year mean multiple, in our view. Our valuation methodology remains unchanged.
We arrive at our new TP of INR650 using a three-stage residual-income valuation method that assumes the following: 1) a 13.6% CAGR for interest-earning assets over FY13-17F, a 6.9% CAGR over FY17-25F and a terminal growth rate of 4%; 2) average ROE of 13.7% over FY14-17F and 11.6% over FY18-FY25F and an 8.8% terminal value ROE; and 3) discount rates ranging from 14.5% (current cost of equity) for FY14-17F, 12% for FY18-25F and a 10% terminal rate. At our TP, BOB should trade at 0.78x our average FY14/15F ABV of INR831 and 6.4x our average FY14/15F EPS of INR102 for an adjusted ROE of 13.2% for FY14F. On NNPL adjusted book, BOB should trade at 1x one-year forward book (fully adjusted for NNPLs) of INR642. We build in capital infusion by GOI of INR5.5bn in 4QFY14F.
Fig. 68: Average RoE vs. average 1-Yr fwd P/ABV
Source: Company data, Bloomberg, Nomura estimates
Y/E March FY09 FY10 FY11 FY12 FY13 FY14F FY15F% of Average assetsInterest Income 7.4% 6.6% 6.9% 7.4% 7.1% 6.79% 6.85%
Interest Expense 4.9% 4.3% 4.1% 4.8% 4.8% 4.72% 4.63%
Net-Interest Income 2.5% 2.4% 2.8% 2.6% 2.3% 2.07% 2.22%
Non-Interest Income 1.3% 1.1% 0.9% 0.8% 0.73% 0.73% 0.77%
Fee income 0.4% 0.5% 0.5% 0.4% 0.37% 0.36% 0.36%
Treasury 0.4% 0.3% 0.1% 0.2% 0.12% 0.13% 0.13%
Forex gains 0.2% 0.2% 0.2% 0.2% 0.16% 0.18% 0.18%
Net Income 3.8% 3.4% 3.6% 3.4% 3.0% 2.80% 2.99%
Operating Expenses 1.8% 1.5% 1.5% 1.3% 1.2% 1.21% 1.26%
Operating Profit 2.1% 1.9% 2.2% 2.1% 1.8% 1.59% 1.73%
Provisions 0.5% 0.3% 0.4% 0.6% 0.8% 0.69% 0.60%
Taxes 0.5% 0.5% 0.4% 0.3% 0.1% 0.15% 0.28%
RoA (%) 1.0% 1.2% 1.3% 1.26% 0.92% 0.74% 0.85%
Avg.assets/avg equity (x) 19.4 20.0 19.0 17.8 17.9 18.0 18.0
RoE (%) 20.4% 23.6% 25.28% 22.3% 16.4% 13.42% 15.28%
0%
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Nomura | Bank Of Baroda December 4, 2013
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Fig. 69: Valuation premium/discount to SBI
Source: Company data, Bloomberg, Nomura estimates
Fig. 70: One-year forward P/ABV multiple
Source: Company data, Bloomberg, Nomura estimates
Fig. 71: One-year forward P/E multiple
Source: Company data, Bloomberg, Nomura estimates
Key risks to our thesis
• Low provision coverage for PSU banks implies stickiness in loan loss provisions even if impairments start declining rapidly.
• Low core equity ratios make PSUs dependent perennially on the government for capital infusion and this is likely to have growth implication.
• Increasing trends on opex ratios: With the increase in pension and wage revision provisioning, in the absence of higher growth, the opex ratios are likely to trend higher for PSUs.
• Ceding market share in CASA deposits and retail assets: With private sector banks gaining incremental share of CASA and retail assets like mortgage; PSU banks would continuously feel pressure on their NIMs. Some of the larger PSUs continue to enjoy a stickier retail franchise owing to their scale and reach but in the longer term they are likely to see some return erosion on account of these factors.
0.73
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BOB - Premium/Discount to SBI
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Nomura | India banks December 4, 2013
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Appendix A-1
Analyst Certification
We, Abhishek Bhattacharya and Amit Nanavati, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Issuer Specific Regulatory Disclosures The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more Nomura Group companies.
Materially mentioned issuers Issuer Ticker Price Price date Stock rating Sector rating Disclosures Bank Of Baroda BOB IN INR 648 03-Dec-2013 Neutral N/A Punjab National Bank PNB IN INR 556 03-Dec-2013 Buy N/A State Bank of India SBIN IN INR 1813 03-Dec-2013 Neutral N/A A1,A2,A3
A1 The Nomura Group has received compensation for non-investment banking products or services from the issuer in the past 12 months.
A2 The Nomura Group had a non-investment banking securities related services client relationship with the issuer during the past 12 months.
A3 The Nomura Group had a non-securities related services client relationship with the issuer during the past 12 months.
Bank Of Baroda (BOB IN) INR 648 (03-Dec-2013) Rating and target price chart (three year history)
Neutral (Sector rating: N/A)
Date Rating Target price Closing price 23-Aug-13 420.00 470.80 04-Feb-13 765.00 804.15 22-Oct-12 675.00 784.45 14-Aug-12 Reduce 638.60 14-Aug-12 590.00 638.60 26-Apr-12 Neutral 766.20 26-Apr-12 820.00 766.20 31-Oct-11 Buy 771.15 31-Oct-11 950.00 771.15
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology We arrive at our target price of INR650 using a three-stage residual-income valuation method that assumes the following: 1) 13.6% CAGR for interest-earning assets over FY13-17F, 6.9% CAGR over FY17-25F and a terminal growth rate of 4%; 2) average ROE of 13.7% over FY14-17F & 11.6% over FY18-FY25F and an 8.8% terminal value ROE; and 3) discount rates ranging from 14.5% (current cost of equity) for FY14-17F, 12% for FY18-25F and a 10% terminal rate. At our TP, BOB should trade at 0.78x our avg. FY14/15F ABV of INR831 and 6.4x our avg. FY14/15F EPS of INR102 for an adjusted ROE of 13.2% for FY14F. On NNPL adjusted book, BOB should trade at 1x one year forward book (fully adjusted for NNPLs) of INR642. We are building in capital infusion by GOI (government of India) of INR5.5bn in 4QFY14F. Risks that may impede the achievement of the target price Key risks to our thesis • Low provision coverage for PSU banks implies stickiness in loan loss provisions even if impairments start declining rapidly. • Low core equity ratios make PSUs
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dependent perennially on the government for capital infusion and this is likely to have growth implication. • Increasing trends on opex ratios: With the increase in pension and wage revision provisioning, in the absence of higher growth, the opex ratios are likely to trend higher for PSUs. • Ceding market share in CASA deposits and retail assets: With private sector banks gaining incremental share of CASA and retail assets like mortgage; PSU banks would continuously feel pressure on their NIMs. Some of the larger PSUs continue to enjoy a stickier retail franchise owing to their scale and reach but in the longer term they are likely to see some return erosion on account of these factors.
Punjab National Bank (PNB IN) INR 556 (03-Dec-2013) Rating and target price chart (three year history)
Buy (Sector rating: N/A)
Date Rating Target price Closing price 23-Aug-13 Reduce 482.30 23-Aug-13 440.00 482.30 10-Jan-13 Buy 888.20 10-Jan-13 1,100.00 888.20 26-Oct-12 710.00 749.45 14-Aug-12 Reduce 732.10 14-Aug-12 680.00 732.10 26-Apr-12 965.00 845.30 31-Oct-11 Neutral 976.25 31-Oct-11 1,070.00 976.25 17-Oct-11 Not Rated 969.80 21-Jan-11 Suspended 1,125.35
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology We arrive at our TP of INR625 using a three-stage residual-income valuation method that assumes the following: 1) 11.5% CAGR for interest-earning assets over FY13-17F, 7.7% CAGR over FY17-25F and a terminal growth rate of 4%; 2) average ROE of 13.6% over FY14-17F and 12.4% over FY18-FY25F and a 6.9% terminal value ROE and 3) discount rates ranging from 16.3% (current cost of equity) for FY14-17F, 12.5% for FY18-25F and a 10% terminal rate. At our TP, PNB should trade at 0.63x our average FY14/15F ABV of INR994 and 5x our average FY14/15F EPS of INR125 for an adjusted ROE of 12.1% for FY14F. On NNPL adjusted book, PNB should trade at 0.93x one year forward book (fully adjusted for NNPLs) of INR670. We are building in capital infusion by GOI (Government of India) of INR5bn in 4QFY14F. Risks that may impede the achievement of the target price Key risks to our thesis: Low provision coverage for PSU banks implies stickiness in loan loss provisions even if impairments start declining rapidly. Low core equity ratios make PSUs dependent perennially on the government for capital infusion; this is likely to have growth implications. Increasing trends on opex ratios: With increases in pensions and wage revision provisionings, in absence of higher growth the opex ratios are likely to trend higher for PSUs. Ceding market share in CASA deposits and retail assets: With private sector banks gaining incremental share of CASA and retail assets like mortgage; PSU banks are likely to continuously feel pressure on their NIMs. Some of the larger PSUs continue to enjoy a stickier retail franchise owing to their scale and reach but in the longer term they are likely to see some return erosion on account of these factors.
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State Bank of India (SBIN IN) INR 1813 (03-Dec-2013) Rating and target price chart (three year history)
Neutral (Sector rating: N/A)
Date Rating Target price Closing price 23-Aug-13 1,400.00 1,559.10 09-Nov-12 1,950.00 2,155.05 13-Aug-12 Reduce 1,906.55 13-Aug-12 1,750.00 1,906.55 26-Apr-12 Neutral 2,162.35 31-Oct-11 Buy 1,906.30 31-Oct-11 2,400.00 1,906.30 17-Oct-11 Not Rated 1,891.70 21-Jan-11 Suspended 2,596.90
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology We arrive at our target price of INR1,900 using SOTP with subsidiaries valued at INR325 and core bank valued at INR1,575 using a three-stage residual-income valuation method that assumes the following: 1) 14.1% CAGR for interest-earning assets over FY13-17F, 9.7% CAGR over FY17-25F and a terminal growth rate of 4%; 2) average ROE of 12.5% over FY14-17F & 12.1% over FY18-FY25F and a 11.6% terminal value ROE; and 3) discount rates ranging from 15.7% (current cost of equity) for FY14-17F, 12.5% for FY18-25F and a 10% terminal rate. At our TP, SBI should trade at 1x our avg. FY14/15F ABV of INR1,610 and 8.3x our avg. FY14/15F EPS of INR190 for an adjusted ROE of 11.2% for FY14F. On NNPL adjusted book, SBI should trade at 1.5x one year forward book (fully adjusted for NNPLs) of INR1,067. We are building in capital infusion by GOI (Government of India) of INR20bn in 4QFY14F. Risks that may impede the achievement of the target price Key risks to our thesis: • Low provision coverage for PSU banks implies stickiness in loan loss provisions even if impairments start declining rapidly. • Low core equity ratios make PSUs dependent perennially on government for capital infusion and this is likely to have growth implication. • Increasing trends on opex ratios - With increase in pension and wage revision provisioning, in absence of higher growth the opex ratios are likely to trend higher for PSUs. • Ceding market share in CASA deposits and retail assets - With private sector banks gaining incremental share of CASA and retail assets like mortgage; PSU banks would continuously feel pressure on their NIMs. Some of the larger PSUs continue to enjoy a stickier retail franchise owing to their scale and reach but in the longer term they are likely to see some return erosion on account of these factors.
Rating and target price changes
Issuer Ticker Old stock rating New stock rating Old target price New target price
Bank Of Baroda BOB IN Reduce Neutral INR 420 INR 650
Punjab National Bank PNB IN Reduce Buy INR 440 INR 625
State Bank of India SBIN IN Reduce Neutral INR 1400 INR 1900
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