Indian Banks: Top Picks
Published on Monday, November 23rd, 2009 at 12:07 PMAuthor: insightt95in (170 Articles)
Indian Banks: Top Picks
a) ICICI Bank (CMP – Rs 890, TP – Rs 1,000)
Positive impact of corrective actions has set the base to accelerate:
Meaningful impact of the initiatives taken by ICICI Bank to strengthen liabilities
franchise and consolidate retail portfolio is quite visible with significant mobilisation
of CASA deposits, domestic margin improvement, decline in adjusted credit cost
and significant cost controls. These considerable fundamental improvements have
set the base for acceleration in assets going forward. The impact of corrective
actions taken over the past several years would be completely visible in FY11E and
we expect a) Assets growth to improve to 18% p.a. in FY11E and FY12E, b)
Margins to improve from 2.2% in FY09 to 2.7% in FY12E, c) Fee income growth to
gain momentum d) LLP charge to peak out in FY10E at 1.9% and improve to 1.6%
by FY12E. Collectively, these improvements would result in risk-adjusted margins
to expand from 88 bps in FY09 to 183 bps in FY12E and ROA to improve from 96
bps in FY09 to ~120 bps in FY12E. Hence, we expect PAT to register a strong
growth of ~17% CAGR during FY09-12E (despite expected decline of 5% in
FY10E). While ROE would remain low for ICICI Bank for few years, we believe price
multiples would also be determined by quality of earnings (which would be
substantially better going ahead). We value the parent at 15x Oct’11E EPS,
implying standalone value of Rs 765 per share. We value subsidiaries at Rs 235
(net of cost of investments), implying Oct’10 TP of Rs. 1,000.
b) HDFC Bank (CMP – Rs 1,725, TP – Rs 1,900)
Acceleration in Loan Book: Improved economic outlook and reduced NPA risk at the
macro level and significantly expanded branch network, continued superior risk adjusted
margins and improvement in cost ratios at company level would drive strong assets and
earning growth for HDFC Bank. Acceleration in loan book is clearly visible in 2Q’10
results and we expect HDFC bank to achieve strong a loan growth as the demand for
loans has picked up significantly in various retail segments. We expect HDFC Bank to
deliver a strong PAT growth of 24% CAGR during FY09-12E. We value HDFC Bank at 22x
Sept’11 EPS (implied FY11E P/BV of 3.7x), implying Sept’10 target price of Rs
1,900.
c) Axis Bank (CMP – Rs 990, TP – Rs 1,175)
Continues to deliver despite challenges: Axis Bank is in consolidation mode
given credit quality pressure the bank is facing. We expect margins to remain at
elevated levels in 2H’10 as the bank deploys recently raised equity and continued repricing
of high cost bulk deposits. We expect NII to witness a strong growth of ~25%
CAGR during FY09-12E. Asset quality remains under pressure, however we expect
abatement in credit costs from FY11 ss the benefits of significant decline in interest rates
and improved economic growth flow down. We expect PAT to register a strong growth of
20% CAGR during FY09-12E, and ROE to recover to ~17% in FY12E post the recent
dilution. We value Axis Bank at 16x Sept’11 EPS (implied FY11E P/BV of 2.6x), implying
Sept’10 target price of Rs 1,175.
d) ING Vysya Bank (CMP – Rs 299, TP – Rs 375)
Improvement in profitability: With the induction of new MD and CEO, Mr.
Shailendra Bhandari, we believe that the growth for the bank is set to accelerate as
management makes higher than system credit growth a priority. ROA of IVB is set to
expand from 66 bps in FY09 to 80 bps in FY12E driven by improved margins, cost ratios
and lower provisions. Improving profitability would result in strong earnings growth
of 27% and 32% in FY11E and FY12E respectively. We believe IVB is at an inflexion
point and has a strong re-rating potential given profitability improvement over the
next 2 years. We value ING Vysya Bank at 13x Oct’11 EPS (implied FY11E P/BV of
1.8x), implying Oct’10 target price of Rs 375.
e) Yes Bank (CMP – Rs 249, TP – Rs 315)
Growth is back, superior return ratios to continue going ahead: Loan growth
during 2Q’10 was strong at 42% yoy respectively (29% sequentially) while incremental
increase in credit was the highest in 3 years. Since the bank is not facing credit quality
pressure, it is in a position to accelerate growth in the current environment and
consequently gain market share. Asset quality has remained strong even during the
recent crisis with gross and net NPLs at 0.31% and 0.08% respectively. With
acceleration in loan growth, capital market improvement and healthy asset quality, Yes
Bank is on track to continue to maintain its superior return ratios. We expect ROA and
ROE of ~ 1.5% and ~19% in FY12E, highest amongst its peer group. We value Yes Bank
at 16x Sept’11 EPS (implied FY11E P/BV of 3x) which seems reasonable given the
growth potential for the bank, implying Oct’10 target price of Rs 315.
f) Bank of Baroda (CMP – Rs 533, TP – Rs 615)
Strong performance to continue: Driven by improved margins and recovery in loan
growth we expect BOB to continue to post strong numbers going ahead. Consequently,
we expect robust NII growth of 28% yoy growth in FY11E. Asset quality continues to
remain healthy with gross NPA and net NPA at 1.3% & 0.27% respectively and coverage
ratio of 79% which is among the best in the industry. We expect BOB to generate stable
ROA of 1% going forward in FY11E as the positive impact of margin improvement and
fee income traction would be negated to an extent by lower treasury profits and higher
credit cost. We expect BOB to generate healthy ROE of ~20% in FY11E and FY12E. We
value BOB at 1.35x adjusted book based on a normalised ROE of 19.2% which gives
Oct’10 TP of Rs 615.
i) Punjab National Bank (CMP – Rs 895, TP – Rs 1,000)
Quality deserves premium: PNB continues to enjoy one of the highest margins in the
industry due to better yields on loans (due to increased proportion of SME loans), high
CASA ratio & deposit repricing. Continued branch expansion (184 new branches in
1H’10) and high CASA ratio would support margins going forward. We expect NII to
expand at 18% CAGR during FY09-12E. Gross NPA & Net NPA of 1.58% & 0.14%
respectively and coverage ratio at 91% is among the best in the industry. Going forward
we expect a) margin to remain stable, b) credit growth to remain robust, c) lower
treasury income and recoveries, d) adjusted credit cost to increase from 33 bps in FY09
to 103 bps in FY11E. We expect ROA to decline marginally before stabilizing in the range
of 1.18% in FY11, and ROE to remain strong at ~22%. We value the stock at 1.5x
adjusted book based on a normalised ROE of 19.9% implying Oct’10 TP of Rs 1,000.
j) Union Bank of India (CMP – Rs 260, TP – Rs 300)
Well managed on the core front: We expect a strong recovery in NIM in coming
quarters and expect NII to post a strong 30% yoy growth in FY11E with credit growth at
18%. Asset quality remains top class with net NPL ratio at 0.23% and coverage ratio of
88%. The bank is on track to generate healthy ROE of over 20% going ahead with
strong recovery in margins and healthy fee income growth to neutralize the adverse
impact of significantly lower treasury income and higher credit costs. We arrive at
Oct’10 TP of Rs 300, valuing the stock at 1.4x adjusted book based on a normalised
ROE of 19.8%.
k) Oriental Bank of Commerce (CMP – Rs 277, TP – Rs 300)
Improvement in core earnings to lead to outperformance: Post its amalgamation
with GTB, OBC has been the biggest laggard amongst banks. While BSE Bankex has
given a return of c. 260% since July’04, OBC has remained flat during the same period
underperforming the index by c.260% which we believe is set to reverse given legacy
issues are behind the bank. Core earnings for OBC will continue to improve driven by
margin expansion and robust growth in fee income. Trading at 0.8x and 5.6x FY11E
book and earnings respectively, we believe that the current valuations are attractive
with chances of negative surprise remote. Based on a normalised ROE of 15.5%, we
value the banking business at 0.84x book implying value of Rs 270 per share. Further,
OBC has 23% stake in life insurance JV with HSBC and Canara Bank which we value at
Rs 30 per share.
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