Muted performance; balance sheet transition continues January 30, 2015 Nitin Kumar nitinkumar@plindia.com +91 22 66322236 Pritesh Bumb priteshbumb@plindia.com +91 22 66322232 Rating Accumulate Price Rs172 Target Price Rs175 Implied Upside 1.7% Sensex 29,183 Nifty 8,809 (Prices as on January 30, 2015) Trading data Market Cap. (Rs bn) 279.1 Shares o/s (m) 1,622.4 3M Avg. Daily value (Rs m) 2315.8 Major shareholders Promoters 0.00% Foreign 47.66% Domestic Inst. 31.10% Public & Other 21.24% Stock Performance (%) 1M 6M 12M Absolute 8.9 10.1 87.6 Relative 2.4 (1.8) 45.3 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2016 12.3 12.5 1.7 2017 12.3 12.1 2.4 Price Performance (RIC:.BO, BB: IN) (Rs) 200 150 100 50 0 Jan 14 Mar 14 May 14 Source: Bloomberg Jul 14 Sep 14 Nov 14 continues to report muted performance in Q3FY15 with PAT de growth of 16% YoY at Rs4.2bn (PLe of Rs4.0bn) but was aided by higher interest income from treasury and healthy non interest income. continues to build its provision cushion (3.9% of loans) and has been building on its investment book (added Rs72.8bn investments sequentially) as its endeavours to smoothly transform itself into a bank. RBI clarified that long term infra bonds (LTIB) can be issued only to fund 30% of loan book against expectation of 100%, which we see as partly negative. However we remain positive on the aspects of its transformation to bank and maintain Accumulate with TP of Rs175. Core performance muted and was mainly led by treasury: Core performance remained muted for and was supported by treasury gains of Rs1.37bn & higher investment income, while interest on loans was lower as margins came off by 10bps sequentially on de growth in loans by 3% YoY. PPOP growth of 8% YoY was subdued on higher opex as it continues to add employees and one off issue related expenses at its AMC subsidiary. The company remains adequately above the requirements of SLR and the LCR requirement of 60% of HQLA in FY15 and continue to build the same in future. Improvement in sanctions & disbursements: Sanctions picked up for second consecutive quarter led by transport/road & other infra segments, while disbursements growth also improved, mainly from telecom segment. Clarification from RBI comes in as negative: got clarification on its eligibility to transfer 30% of loans lent to infrastructure by LTIB and was in line with forbearance given to banks for CRR/SLR/PSL exemption against an expectation of complete transfer of 100% of eligible loan book which would have been beneficial to the transformed Bank. We estimate only 18 20% of loan book will be eligible for such exemption. This clarification is slight negative for as cost of funds will remain high and will challenge the bank s ability to address competition as benefits remained restricted. Key Financials (Y/e March) 2014 2015E 2016E 2017E Net interest income (Rs m) 27,040 26,434 27,949 28,411 Growth (%) 6.7 (2.2) 5.7 1.7 Non interest income (Rs m) 10,310 12,125 12,121 13,405 Operating Profit (Rs m) 31,912 31,920 31,822 31,975 PAT (Rs m) 18,022 17,259 19,884 20,032 EPS (Rs) 11.9 10.6 12.3 12.3 Growth (%) (2.0) (10.5) 15.2 0.7 Net DPS (Rs) 3.1 3.7 4.5 5.4 Profitability & valuation 2014 2015E 2016E 2017E Spreads / Margins (%) 3.7 3.4 3.4 3.1 RoAE (%) 12.5 10.5 10.8 10.1 RoAA (%) 2.5 2.2 2.4 2.2 P/E (x) 14.5 16.2 14.0 13.9 P/BV (x) 1.7 1.6 1.5 1.4 P/ABV (x) 1.8 1.6 1.5 1.4 Net dividend yield (%) 1.8 2.2 2.6 3.1 Source: Company Data; PL Research Q1FY15 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
NII growth remained flattish YoY but has been from investment income Opex remains high as continues to add capacity in transition to Bank, while its subsidiary AMC booked now issue related expenses continues to make counter cyclical buffer provisions on specific loans. CCB now stands at 3.3% o loans Exhibit 1: Q3FY15 results Muted performance as treasury gains support PAT (Rs m) YoY QoQ Net interest income 6,640 6,490 6,620 0% 2% Non interest income 1,900 4,530 3,180 67% 30% Operating income 8,540 11,020 9,800 15% 11% Operating expense 1,290 1,970 1,980 53% 1% Pre provision profits 7,250 9,050 7,820 8% 14% Provisions and losses 370 2,810 1,530 314% 46% Profit before tax 6,880 6,240 6,290 9% 1% Tax 1,860 2,010 2,090 12% 4% PAT 5,010 4,230 4,200 16% 1% Spreads (12 mnth rolling) 2.30 2.10 2.00 (0.30) (0.10) Prov/PPOP 4.1% 3.8% 3.7% 0.4% 0.1% Cost/Income 5.1% 31.0% 19.6% 14.5% 11.5% Tax rate 15.1% 17.9% 20.2% 5.1% 2.3% Loans (Rs m) 535,650 530,380 520,060 2.9% 1.9% Borrowings (Rs m) 516,300 595,640 659,740 28% 11% Disbursals (Rs m) 20,090 68,540 70,596 251% 3% Sanctions (Rs m) 54,000 102,130 153,590 184% 50% Incremental disbursements continues to remains from telecom infra related segment Fee income growth remained decent especially from the AMC business. Q2FY15 saw one off income booked for two road projects sold and was not there in Q3FY15. While the company booked higher treasury gains on lower yields as it was building on higher investments assets from few quarters O/s Disbursements Power 240,890 248,650 237,790 1% 4% Transportation 143,410 139,530 133,660 7% 4% Telecom 117,680 113,830 123,120 5% 8% Others 83,510 83,020 79,480 5% 4% Total 585,490 585,030 574,050 2% 2% Non Interest Income 1,870 4,490 3,170 70% 29% Principal Investment 760 2,860 570 25% 80% Asset management 1,010 1,070 1,150 14% 7% IB & Broking 190 240 130 32% 46% Fixed Income (300) 50 1,280 327% 2460% Loan related & other fees 210 270 40 81% 85% January 30, 2015 2
Conference call Highlights: Loan book, Investments & Funding: Loan book Rs60bn raised through infra bonds (raising Rs20bn per month). Management will appropriately match ALM requirements with asset maturity. Investments Treasury gains were Rs1.37bn on proactive treasury and build up done earlier have benefitted treasury. Have been above the required LCR of 60% and will continue to stay so going ahead. To neutralise cost of replacing bonds have temporarily lent in the Repo window. Break up Gsec portfolio at Rs16bn (approx). Regulatory Clarification: 30% of the outstanding infrastructure loans eligible (60% of loans is project based) for availing SLR/CRR/PSL benefit on loans funded through long term bond funding raised only post 15 th Jul 14 and the benefit would be applicable from the date of demerger of. This clarification is in line with what Banks have got as benefit and not as per the expectation of complete movement of eligible loan book. Asset Quality: Restructured Loans & NPA 6.1% of loans. 87% of restructured from energy sector of which 30% is Gas based projects. NPA currently based on 180 day recognition. Provisions Continues to make additional provisions as counter cyclical buffer. Provisioning levels will increase till Bank is operational (upto 30 th Sept 15). Net SRs 0.3% of loans Subsidiaries IDF subsidiary In dialogue with RBI & GOI for the IDF sub which will be infra related lending. Others Non staff related expenses increase was in the AMC business on new issue expenses De merger: Have got impending approvals from RBI & Shareholders for de merging into Bank. Are consequently applying to Madras High Court for the required approvals. January 30, 2015 3
Exhibit 2: Sanctions have picked up but incrementally has been from transport and other infra (Rs bn) 250 200 150 100 50 Sanctions Exhibit 3: Loan growth remains sluggish as disbursements remain sluggish while repayments remain high 60% 40% 20% 0% Loan Book growth YoY 0 20% Exhibit 4: Disbursements trends have improved but has been from Telecom segment 120.00 Disbursements 100.00 80.00 (Rs bn) 60.00 40.00 20.00 0.00 Exhibit 5: Rolling spreads has come off further 2.80 2.70 2.60 2.50 2.40 2.30 2.20 2.10 2.00 1.90 Spreads January 30, 2015 4
Exhibit 6: We expect ROEs to come off to high single teens FY11 FY12 FY13 FY14 FY15E FY16E FY17E We expect FY15E & FY16E ROEs to remain towards ~10% as bank makes higher floating provisions & builds in capacity which will increase Opex. Also slower loan growth will impact margins. We are yet to build in transition to Bank in our financials which will happen in Q1FY15. Net Interest Margin 3.92% 4.06% 4.12% 4.00% 3.78% 3.68% 3.31% Core Fees 1.60% 0.92% 1.10% 1.01% 1.30% 1.19% 1.18% Capital gains Infra 0.69% 0.81% 0.36% 0.51% 0.43% 0.41% 0.38% Treasury 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Net revenues 6.21% 5.79% 5.59% 5.52% 5.51% 5.28% 4.87% Operating costs 1.30% 1.02% 0.86% 0.80% 0.95% 1.09% 1.15% Provisions 0.57% 0.56% 0.57% 0.93% 1.16% 0.58% 0.55% Taxes 1.22% 1.17% 1.18% 1.12% 0.94% 0.99% 0.84% Costs 3.09% 2.75% 2.61% 2.86% 3.04% 2.66% 2.54% ROA 3.12% 3.04% 2.98% 2.66% 2.47% 2.62% 2.33% Equity/Assets 21.2% 22.2% 21.0% 21.24% 23.42% 24.32% 23.19% ROE 14.7% 13.7% 14.1% 12.5% 10.5% 10.8% 10.1% Exhibit 7: We retain our Sep 16 TP of Rs175 as transitioning to bank remains on track, while the company continues to build capacity, provision buffer and investments assets which would allow smooth transition. Risk free rate 8.0% Equity Risk Premium 6.0% Beta 1.17 Cost of Equity 15.0% Terminal growth 5.0% Stage 2 growth 12.5% Normalised ROE 14.5% Sep 16 PT 175 Implied Sep 16 P/E 1.43 Implied Sep 16 P/B 14.23 January 30, 2015 5
Income Statement (Rs m) Int. Inc. / Opt. Inc. 77,592 78,668 82,332 90,049 Interest Expenses 50,552 52,233 54,383 61,639 Net interest income 27,040 26,434 27,949 28,411 Growth (%) 6.7 (2.2) 5.7 1.7 Non interest income 10,310 12,125 12,121 13,405 Growth (%) 13.0 17.6 10.6 Net operating income 37,350 38,559 40,069 41,816 Expenditure Employees 2,883 3,604 4,504 5,405 Other expenses 2,555 3,035 3,743 4,435 Depreciation Total expenditure 5,438 6,639 8,247 9,841 PPP 31,912 31,920 31,822 31,975 Growth (%) 9.4 (0.3) 0.5 Provision 6,290 8,114 4,396 4,721 Other income Exchange Gain / (Loss) Profit before tax 25,622 23,806 27,426 27,254 Tax 7,600 6,547 7,542 7,222 Effective tax rate (%) 29.7 27.5 27.5 26.5 PAT 18,022 17,259 19,884 20,032 Growth (%) (1.9) (4.2) 15.2 0.7 Quarterly Financials (Rs m) Y/e March Q4FY14 Q1FY15 Q2FY15 Q3FY15 Int. Inc. / Operating Inc. Income from securitization Interest Expenses Net Interest Income 6,680 6,820 6,490 6,620 Growth 3.9 (0.6) (5.4) (0.3) Non interest income 3,040 2,050 4,530 3,180 Net operating income 9,720 8,870 11,020 9,800 Growth (3.7) (13.1) 23.8 14.8 Operating expenditure 1,380 550 1,970 1,980 PPP 8,340 8,320 9,050 7,820 Growth (2.8) (5.7) 20.3 7.9 Provision 4,830 2,040 2,810 1,530 Exchange Gain / (Loss) Profit before tax 3,510 6,280 6,240 6,290 Tax 930 1,460 2,010 2,090 Prov. for deferred tax liability Effective tax rate (%) 26.5 23.2 32.2 33.2 PAT 2,580 4,820 4,230 4,200 Growth (51.0) (13.5) (13.3) (16.2) Balance Sheet (Rs m) Sources of funds Equity 15,163 16,224 16,224 16,224 Reserves & Surplus 135,420 161,069 175,603 190,244 Networth 150,583 177,294 191,827 206,468 Growth (%) 10.1 17.7 8.2 7.6 Loan funds 559,150 564,408 631,175 730,360 Growth (%) 0.9 11.8 15.7 Others Minority Interest Deferred Tax Liability 35,397 38,676 42,321 46,317 Total 751,630 786,878 871,823 989,646 Application of funds Net fixed assets 3,286 3,245 3,171 3,077 Advances 565,950 582,929 629,563 679,928 Growth (%) 1.5 3.0 8.0 8.0 Net current assets 3,904 4,685 5,528 6,523 Investments 113,087 129,449 165,752 230,592 Growth (%) 2.8 14.5 28.0 39.1 Other Assets 65,404 66,570 67,809 69,127 Total 751,630 786,766 871,710 989,133. Key Ratios CMP (Rs) 172 172 172 172 Eq. Shrs. O/s. (m) 1,516 1,622 1,622 1,622 Market Cap (Rs m) 260,878 279,139 279,139 279,139 Market Cap to AUM (%) 34.7 35.5 32.0 28.2 EPS (Rs) 11.9 10.6 12.3 12.3 Book Value (Rs) 99.3 109.3 118.2 127.3 Adjusted Book Value (Rs) 97.8 106.9 114.8 122.7 P/E (x) 14.5 16.2 14.0 13.9 P/BV (x) 1.7 1.6 1.5 1.4 P/ABV (x) 1.8 1.6 1.5 1.4 DPS (Rs) 3.1 3.7 4.5 5.4 Dividend Yield (%) 1.8 2.2 2.6 3.1 Asset Quality Gross NPAs (Rs m) 3,396 7,074 10,805 14,834 Net NPAs (Rs m) 2,342 3,891 5,619 7,417 Gross NPAs to Gross Adv. (%) 0.6 1.2 1.7 2.2 Net NPAs to Net Adv. (%) 0.4 0.7 0.9 1.1 NPA Coverage (%) 31.0 45.0 48.0 50.0 Profitability (%) NIM 3.7 3.4 3.4 3.1 RoAA 2.5 2.2 2.4 2.2 RoAE 12.5 10.5 10.8 10.1. January 30, 2015 6
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