Banking India (IIB) IIB IN; IIB.BO Institutional Equity Research April 16, 2015 result review HOLD Healthy growth, high NIM, rich valuations Current price (16 Apr) Rs 934 Target price Rs 960 Upside/(downside) % 3 Earning estimate Revised Market data Mkt capitalisation Rs bn 494.8 Average daily vol '000 948.2 52-week H/L Rs 967 / 471 Shares O/S mn 529.5 Free float mn 449.6 Promotor holding % 15.1 Foreign holding % 39.7 Face value Rs 10.0 Price performance 1m 3m 6m 1yr Nifty (abs) 0.9 2.3 12.4 30.4 Stock (abs) 6.5 12.3 44.8 91.8 Relative to Index 5.7 10.1 32.4 61.4 Performance 1000 850 700 550 400 (20) Apr-14 Jul-14 Oct-14 Jan-15 IIB (LHS) Source: Bloomberg, SSLe 60 40 20 0 Rel. to Bankex (RHS) Robust advance growth, driven by corporate book: s (IIB) earnings came largely inline with SSLe in, driven by a healthy net interest income and robust fee income growth. The Bank s advances grew well ahead of system at 24.8% YoY (7.7% QoQ). The corporate loan book improved 33.2% YoY to push credit growth, with its share in the overall loan book increasing 370bps YoY to 58.7% in. While the consumer finance division grew at a slower pace, dragged by the vehicle-finance business lending to the loan against property (LAP), the home loan segment grew at a robust pace. The share of LAP in the overall loan book has increased to 5.5% from 4.9% a year ago. We expect advances to grow at a CAGR of ~26% over F15 F17. Stable NIM, better fees, lower productivity: NIM remained stable at 3.65 during the quarter, with improvement in the CASA share and a higher credit-deposit of 93%. The Bank rationalized the higher interest rates on savings bank products (4% up to 100k). The management is well on track to double its branch network to 1200 by F17e (7 in F15). A higher CASA share and improving cost of funds are expected to help NIM improve to 3.9% by F17e. The Bank s non-interest income jumped 26% YoY, driven by improvement in fee income. As a percent of assets, fee income has improved 12bps to 2.4%. Productivity decreased marginally (cost-income increased 140bps to 46.3%) on account of continuous investment in branches and employees. We expect stable fees and productivity going forward. Higher slippages, better outlook: IIB s gross NPA improved to 0.8% driven by selling accounts to asset reconstruction companies. However, gross slippages increased to 3% of advances compared to 1.5% in, largely on account of corporate segment. The management expects asset quality to remain stable going forward. An adequate NPA coverage of 63% and low re-structured portfolio of 0.5%, likely to keep credit costs under check. Valuations: a) Healthy asset quality, b) steady NIMs and c) robust advance growth, are expected to drive a robust 1.8% ROA over F16e/F17e. On the back of rich valuations, we maintain HOLD on the stock with a target price of Rs960. At our target price, the stock would trade at 4.0x F16e and 3.5x F17e PBV. Our target price is based on the two-stage DDM (CoE: 14.9%; beta: 1.1;Rf: 8.0%) valuation method. Key Risks: a) Delay in pickup in CV cycle and b) change in management. Kaitav Shah +91 22 42 3349 kaitav.shah@sbicapsec.com Sanket Chheda +91 22 42 3385 sanket.chheda@sbicapsec.com Financial summary Y/E March (Rs mn) F13 F14 F15e F16e F17e Net interest income 22,329 28,907 34,203 42,743 55,316 NIM 3.54 3.75 3.64 3.73 3.90 Operating profit 18,395 25,960 30,984 38,738 48,128 PAT 10,612 14,080 17,937 22,888 28,491 EPS 20.3 26.8 33.9 43.0 53.3 ABV 139.2 161.0 189.3 222.7 266.0 P/ABV (x) 6.8 5.9 5.0 4.2 3.6 P/E (x) 46.6 35.3.9 22.0 17.7 Dividend yield 0.3 0.4 0.5 0.6 0.7 RoE 17.2 16.9 18.2 19.8 20.8 RoAA 1.6 1.8 1.8 1.9 1.9 SBICAP Research on Bloomberg SBICAP <GO>, www.securities.com Please refer to our disclaimer given at the last page.
Quarterly financials Y/E March (Rs mn) YoY QoQ e Var. Interest earned 25,790 21,793 18.3 24,370 5.8 25,790 0.0 Interest expended 16,538 13,981 18.3 15,756 5.0 16,538 (0.0) Net interest income 9,251 7,812 18.4 8,614 7.4 9,251 0.0 Other income 6,585 5,229 25.9 6,108 7.8 6,585 (0.0) Operating income 15,836 13,041 21.4 14,721 7.6 15,836 0.0 Operating expenses 7,331 5,851 25.3 6,981 5.0 7,331 (0.0) -staff expenses 2,654 2,079.6 2,554 3.9 2,654 (0.0) Cost-income 46.0 44.9 114bps 47.4-142bps 46.3-29bps Operating profit 8,505 7,191 18.3 7,740 9.9 8,505 0.0 Non-tax provisions 1,074 1,206 (10.9) 980 9.6 1,074 0.0 Profit before tax 7,431 5,985 24.1 6,760 9.9 7,431 0.0 Taxes 2,478 2,025 22.4 2,286 8.4 2,482 (0.1) Tax rate 33.3 33.8-48bps 33.8-48bps 33.4-5bps Profit after tax 4,953 3,961 25.1 4,473 10.7 4,949 0.1 Extraordinary income 0 0 0.0 0 0.0 0 0.0 Profit after tax 4,953 3,961 25.1 4,473 10.7 4,949 0.1 Key takeaways from analyst meet: The CV cycle has bottomed out and the Bank is ready to take advantage of the uptick. Slippages from the portfolio are likely to come off. The Bank intends to increase the retail loan book portfolio to nearly 50%. The management intends to maintain NIM and CASA at 4% and 40%, respectively, in the medium term. IIB s LAP segment continues to do well. The average ticket size in the portfolio is close to Rs7.5mn, with its loan to value segment standing at 48%. The acquired diamond and jewellery portfolio maintained a stable performing book, with NPA coming below 0.5%. The Bank has added about 32 employees by virtue of this acquisition. IIB s tie-up with ABN AMRO Bank is related to sharing of information and risk management practices. IIB sold four accounts to the tune of Rs4.1bn to asset reconstruction companies during the quarter, out of which RBI declared one account fraudulent. The Bank took a hit of Rs2.5bn to be provided equally over eight quarters. The Bank s outstanding security receipts are worth Rsbn. IIB s capital adequacy with Tier 1 of 11.5% is adequate; however, the management will evaluate all capital raising opportunities if loan growth picks up. April 16, 2015 21
Advances growth remains robust Shift to corporate continues (Rs bn) 710 598 92 93 91 92 91 92 93 96 91 100% 75% 43 47 55 63 64 75 90 205 232 248 0 5 293 314 (Rs bn) 485 373 80 79 80 83 83 83 83 82 85 86 81 50% 25% 19 22 42 41 30 35 39 24 40 37 26 40 39 39 21 26 39 25 28 29 29 25 30 29 26 31 29 28 28 29 28 28 28 103 100 96 96 97 100 106 260 Advances (LHS) Credit-deposit (RHS) 76 0% Commercial Vehicles Equipment Financing Two wheelers Car Loans Utility Vehicle + 3W Home Loan + LAP Personal Loans + Credit Card Corporate banking Strong strides in CASA share Investment in branch network drives higher cost 240 33 34 34 34 35 7.0 53.0 54 (Rs bn) 198 155 113 28 28 28 28 29 29 30 32 32 33 33 31 28 (Rs mn) 6.3 5.5 4.8 51.8 51.3 50.8 50.8 50.8 50.4 48.6 48.7 48.8 48.4 48.0 47.8 49.7 50.5 49.1 52 50 48 70 CASA (LHS) CASA share (RHS) 26 4.0 Avg. profit per branch (LHS) Core cost-income (RHS) 46 Fees are improving Stable asset quality (Rs mn) 6.0 4.9 3.8 2.1 2.1 2.3 2.4 2.3 2.5 2.5 2.4 2.4 2.6 2.4 (bps) 70 60 50 2.6 1.9 1.9 2.0 1.5 1.8 73 72 72 73 73 72 70 70 80 80 74 70 70 70 70 82 77 71 40 63 66 30 60 Fees & Comm. (LHS) % of avg earnings assets (RHS) Annualized NPA prov (LHS) NPA coverage (RHS) April 16, 2015 22
PBV chart (1-yr forward) 1,250 1,000 750 500 250 0 Apr-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14 Price 1.5x 2.5x 3.5x 4.5x Historical PBV mean valuations (1-yr forward) 5.0 4.0 3.0 2.0 1.0 0.0 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 (x) mean stdev +1SD -1SD +2SD -2SD PE chart (1-yr forward) 1,250 1,000 750 500 250 0 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Prices 10x 15x 20x 25x April 16, 2015 23
Roaa decomposition Key Assumptions Y/E March F13 F14 F15e F16e F17e Y/E Mar (Rs mn) F15e F16e F17e Net interest income 3.41 3.61 3.49 3.57 3.74 Balance Sheet Assumptions Other income 2.08 2.36 2.45 2.36 2.18 Credit Growth (%YoY) 24.8 26.0 30.0 -Fee-based income 1.45 1.46 1.49 1.45 1.38 Deposits Growth (%YoY) 22.5.1 31.4 -Treasury income 0.10 0.06 0.08 0.06 0.02 Investments Growth (%YoY) 15.3 17.5 22.9 -Other miscellaneous income 0.54 0.83 0.88 0.84 0.79 CD Ratio 92.8 92.0 91.0 Operating income 5.49 5.96 5.94 5.92 5.92 Operating expenses 2.68 2.73 2.78 2.69 2.67 Asset Quality Assumptions Pre-provision profits (PPP) 2.81 3.24 3.16 3.23 3.25 Slippage Ratio 1.2 1.0 1.0 Provisions 0.40 0.58 0.40 0.37 0.37 Net Recovery Ratio 41.5 39.4 37.2 Profit before taxes 2.41 2.65 2.76 2.87 2.88 Provisioning Cover 70.6 70.6 72.8 Taxes 0.79 0.90 0.93 0.96 0.96 Profit after taxes 1.62 1.76 1.83 1.91 1.92 Financials Income statement Ratios Y/E March (Rs mn) F 13 F 14 F 15e F 16e F 17e Y/E March (Rs mn) F 13 F 14 F 15e F 16e F 17e Interest earned 69,832 82,535 96,920 121,490 152,966 Earning ratios Interest expended 47,504 53,628 62,717 78,747 97,650 Yield on advances 14.1 13.3 13.1 13.0 12.9 Net interest income 22,329 28,907 34,203 42,743 55,316 Yield on investments 7.5 7.2 7.1 7.1 7.0 Growth 31.0 29.5 18.3 25.0 29.4 Cost of deposits 8.3 7.6 7.6 7.5 7.4 Other income 13,630 18,905 24,039 28,206 32,350 Spread 3.4 3.4 3.5 3.4 3.3 Fee-based income 9,470 11,706 14,632 17,413 20,373 NIM 3.5 3.7 3.6 3.7 3.9 Treasury income 644 518 800 700 300 C/I ratio 48.8 45.7 46.8 45.4 45.1 Other miscellaneous income 3,515 6,681 8,606 10,094 11,677 C/I (excl. treasury gains) 49.7 46.2 47.5 45.9 45.3 Operating income 35,958 47,812 58,242 70,949 87,666 Growth 32.4 33.0 21.8 21.8 23.6 Profitability ratios Operating expenses 17,564 21,853,258 32,211 39,537 RoE 17.2 16.9 18.2 19.8 20.8 Staff cost 6,615 8,093 9,803 11,596 14,431 RoA 1.6 1.8 1.8 1.9 1.9 Other operating expense 10,949 13,760 17,455 20,615 25,106 OPM 22.0 25.6 25.6 25.9 26.0 Pre-provision profits (PPP) 18,395 25,960 30,984 38,738 48,128 NPM 12.7 13.9 14.8 15.3 15.4 Growth 34.0 41.1 19.4 25.0 24.2 Provisions 2,631 4,676 3,891 4,372 5,413 Asset quality Profit before taxes 15,764 21,283,093 34,366 42,715 Gross NPAs 1.0 1.1 1.1 1.0 1.0 Taxes 5,152 7,203 9,157 11,478 14,224 Net NPAs 0.3 0.3 0.3 0.3 0.3 Tax rate 32.7 33.8 33.8 33.4 33.3 NPA coverage 70.1 70.4 70.6 70.6 72.8 Profit after taxes 10,612 14,080 17,937 22,888 28,491 NNPA/networth 1.8 2.0 2.1 2.1 2.0 Growth 3 32.7.4.6 24.5 Capital adequacy ratio Tier-I 13.8 12.7 13.2 12.4 11.4 Balance sheet Tier-II 1.6 1.1 1.4 1.0 0.9 Y/E March (Rs mn) F 13 F 14 F 15e F 16e F 17e Total 15.4 13.8 14.6 13.4 12.3 Capital 5,229 5,256 5,295 5,321 5,348 Equity Multiplier (x) 10.6 9.6 10.0 10.3 10.8 Reserves & surplus 71,074 85,173 101,151 119,774 143,896 Networth 76,303 90,430 106,445 125,095 149,244 Per share data Deposits 541,167 605,023 741,344 942,099 1,238,188 O/s shares (mn.) 523 526 529 532 535 Borrowings 94,596 147,620 206,181 195,872 225,252 EPS 20 34 43 53 Other liabilities & provisions 21,000,187 37,190 40,909 45,000 Book value per share 142 164 194 228 2 Total liabilities 733,065 870,259 1,091,159 1,303,974 1,657,684 Adjusted book value 139 161 189 223 266 Dividend per share 3 4 4 6 7 Cash & Bank Balances 68,487 67,694 107,791 90,425 102,236 Advances 443,206 551,018 687,882 866,731 1,126,751 Valuations (x) Investments 196,542 215,630 248,594 292,051 359,074 P/E 46.6 35.3.9 22.0 17.7 Fixed assets 7,561 10,164 11,576 24,645 31,330 P/BV 6.7 5.7 4.9 4.2 3.5 Other assets 17,269 25,753 35,316 30,122 38,292 P/ABV 6.8 5.9 5.0 4.2 3.6 Total assets 733,065 870,259 1,091,159 1,303,974 1,657,684 Dividend yield 0.3 0.4 0.5 0.6 0.7 April 16, 2015 24
Recommendation History 1100 900 700 500 300 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 BUY HOLD SELL Stock Price Target Price Date Stock Price TP Rec. 18-Apr-13 450 536 BUY 10-Jul-13 496 550 BUY 14-Oct-13 428 550 BUY 10-Jan-14 406 550 BUY 17-Apr-14 499 620 BUY 9-Jul-14 544 636 BUY 13-Oct-14 635 700 HOLD 30-Mar-15 888 960 HOLD 16-934 960 HOLD Source: Bloomberg, SSLe SBICAP Securities Limited Corporate Office: Mafatlal Chambers, A-Wing, 2nd Floor, N. M. Joshi Marg, Lower Parel, Mumbai -400013. Tel.: 91-22-423300/01 Fax: 91-22-423335 Email: sbicapresearch@sbicapsec.com www.sbismart.com KEY TO INVESTMENT RATINGS (w.e.f. February 2013) Guide to the expected return over the next 12 months. 1=BUY (expected to give absolute returns of 15 or more percentage points); 2=HOLD (expected to give absolute returns between -10 to 15 percentage points); 3=SELL (expected to give absolute returns less then - 10 percentage points) DISCLAIMER We, Kaitav Shah, MBA (Finance) Analyst and Sanket Chheda (MBA Finance) Research Associate authors of this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuers or securities. This report has been prepared based upon information available to the public and sources, believed to be reliable. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendations or views in this report. SBICAP Securities Limited (SSL),a full service Stock Broking Company and a member of National Stock Exchange of India Ltd. (NSE) and Bombay Stock Exchange Ltd. (BSE). SSL is a wholly owned subsidiary of SBI Capital Markets Limited (SBICAP), which is engaged into the investment banking activities and is registered with the Securities and Exchange Board of India as a Category I Merchant Banker. SBICAP (Singapore) Limited, a fellow subsidiary of SSL, incorporated in Singapore is regulated by the Monetary Authority of Singapore as a holder of a capital markets services license and an exempt financial adviser in Singapore. SBICAP (Singapore) Limited s services are available only to accredited investors (other than individuals), and institutional investors in Singapore as defined in section 4A of the Securities and Futures Act (Cap. 289) of Singapore. SBICAP (Singapore) is a wholly owned subsidiary of SBICAP. SBICAP (UK) Limited, a fellow subsidiary of SSL, incorporated in United Kingdom is authorised and regulated by the Financial Services Authority. [SBICAP, SBICAP (Singapore) Limited, SBICAP (UK) Limited and SSL are collectively referred to as SBICAP Entities]. Recipients of this report should assume that SBICAP Entities (and/or its Affiliates) is seeking (or may seek or will seek) Investment Banking, advisory, project finance or other businesses and may receive commission, brokerage, fees or other compensation from the company or companies that are the subject of this material/ report. SSL (and/or its Affiliates) and its officers, directors and employees, including the analysts and others involved in the preparation/issuance of this material and their dependant(s), may on the date of this report/from time to time, have long/short positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. SSL s sales people, dealers, traders and other professionals may provide oral or written market commentary or trading strategies to its clients that reflect opinion that are contrary to the opinions expressed herein, and its proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. SSL may have earlier issued or may issue in future reports on the companies covered herein with recommendations/ information inconsistent or different from those made in this report. In reviewing this document, you should be aware that any or all of the foregoing, among other things, may give rise to potential conflicts of interest. Please ensure that you have read Risk Disclosure Document for Capital Market and Derivatives Segments as prescribed by Securities and Exchange Board of India before investing in Indian Securities Market. The projections and forecasts described in this report should be carefully evaluated as these 1. Are based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. 2. Can be expected that some of the estimates on which these were based, will not materialize or will vary significantly from actual results, and such variances may increase over time. 3. Are not prepared with a view towards compliance with published guidelines or generally accepted accounting principles. No independent accountants have expressed an opinion or any other form of assurance on these. 4. Should not be regarded, by mere inclusion in this report, as a representation or warranty by or on behalf of SSL the authors of this report, or any other person, that these or their underlying assumptions will be achieved. This report is for information purposes only and SBICAP Entities accept no liabilities for any loss or damage of any kind arising out of the use of this report. Though disseminated to clients simultaneously, not all clients may receive this report at the same time. SSL will not treat recipients as clients by virtue of their receiving this report. It should not be construed as an offer to sell or solicitation of an offer to buy, purchase or subscribe to any securities this report shall not form the basis of or be relied upon in connection with any contract or commitment, whatsoever. This report does not solicit any action based on the material contained herein. It does not constitute a personal recommendation and does not take into account the specific investment objectives, financial situation/circumstances and the particular needs of any specific person who may receive this document. The securities discussed in this report may not be suitable for all the investors. SSL does not provide tax advice to its clients and you should independently evaluate the suitability of this report and all investors are strongly advised to April 16, 2015 25
seek professional consultation regarding any potential investment. Nothing in this report is intended by SBICAP Entities to be construed as legal, accounting or tax advice. Certain transactions including those involving futures, options, and other derivatives as well as non-investment grade securities give rise to substantial risk and are not suitable for all investors. Foreign currency denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the investment. Investors in securities such as ADRs, the value of which are influenced by foreign currencies effectively assume currency risk. The price, value and income of the investments referred to in this report may fluctuate and investors may realize losses on any investments. Past performance is not a guide for future performance. Actual results may differ materially from those set forth in projections. SSL has reviewed the report and, the current or historical information included here is believed to be reliable, the accuracy and completeness of which is not guaranteed. SSL endeavors to update on a reasonable basis the information discussed in this document/material/ report, but regulatory compliance or other reasons may prevent it from doing so. This report/document has been prepared by SSL based upon information available to the public and sources, believed to be reliable. No representation or warranty, express or implied is made that it is accurate or complete. The opinions expressed in this report are subject to change without notice and have no obligation to tell the clients when opinions or information in this report change. This report has not been approved and will not or may not be reviewed or approved by any statutory or regulatory authority in India, United Kingdom or Singapore or by any Stock Exchange in India, United Kingdom or Singapore. This report may not be all inclusive and may not contain all the information that the recipient may consider material. This report does not constitute or purport to constitute investment advice in publicly accessible media and should not be reproduced, transmitted or published by the recipient. The report is for the use and consumption of the recipient only. This report or any portion hereof may not be printed, sold or distributed without the written consent of SBICAP Entities. The securities described herein may not be eligible for sale in all jurisdictions or to all categories of investors. The countries in which the companies mentioned in this report are organized may have restrictions on investments, voting rights or dealings in securities by nationals of other countries. Distributing /taking/sending/dispatching/transmitting this document in certain foreign jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions. Failure to comply with this restriction may constitute a violation of any foreign jurisdiction laws. Neither SBICAP Entities nor its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Further, no representation or warranty, expressed or implied, is made or given by or on behalf of SBICAP Entities, nor any person who controls it or any director, officer, employee, advisor or agent of it, or affiliate of any such person or such persons as to the accuracy, authenticity, completeness or fairness of the information or opinions contained in this report and SBICAP Entities or such persons do not accept any responsibility or liability for any such information or opinions and therefore, any liability or responsibility is expressly disclaimed. Legal Entity Disclosure Singapore: This report may be distributed in Singapore by SBICAP (Singapore) Limited (Registration No. 201026168R), a holder of a capital markets services license and an exempt financial adviser in Singapore and solely to persons who qualify as institutional investors or accredited investors (other than individuals) as defined in section 4A(1) of the Securities and Futures Act, Chapter 289 of Singapore (the SFA ) and is not intended to be distributed directly or indirectly to any other class of person. Persons in Singapore should contact SBICAP (Singapore) Limited in respect of any matters arising from, or in connection with this report. United Kingdom: This marketing communication is being solely issued to and directed at persons (i) fall within one of the categories of Investment Professionals as defined in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the Financial Promotion Order ), (ii) fall within any of the categories of persons described in Article 49 of the Financial Promotion Order ( High net worth companies, unincorporated associations etc. ) or (iii) any other person to whom it may otherwise lawfully be made available (together Relevant Persons ) by SSL. The materials are exempt from the general restriction on the communication of invitations or inducements to enter into investment activity on the basis that they are only being made to Relevant Persons and have therefore not been approved by an authorised person as would otherwise be required by section 21 of the Financial Services and Markets Act 2000 ( FSMA ). This report is issued and distributed by SBICAP Entities without any liability / undertaking / commitment on the part of itselves or SBI Capital Markets Limited or State Bank of India or any other entity in the State Bank Group. Further, in case of any commitment on behalf of State Bank of India or SBI Capital Markets Limited or any entity in the State Bank Group, such commitment is valid only when separately confirmed by that entity. April 16, 2015 26