Banking India (KVB) KVB IN; KVB.BO Institutional Equity Research May 2, 2015 result review HOLD Consolidating growth, high capital, elevated slippages Current price (30 Apr) Rs 482 Target price Rs 560 Upside/(downside) % 16 Earning estimate Revised Market data Mkt capitalisation Rs bn 58.2 Average daily vol '000 60.5 52-week H/L Rs 619 / 368 Shares O/S mn 120.9 Free float mn 118.3 Promotor holding % 2.2 Foreign holding % 2 Face value Rs 10.0 Price performance 1m 3m 6m 1yr Nifty (abs) (3.6) (7.1) () 22.2 Stock (abs) (1) (19.1) (1) 23.7 Relative to Index (7.8) (12.0) (10.0) Performance 700 600 500 400 (10) 300 (20) Apr-14 Jul-14 Oct-14 Jan-15 (LHS) Source: Bloomberg, SSLe 20 10 0 Rel. to Bankex (RHS) Consolidating loan growth, moderate outlook: s (KVB) earnings came in line with SSLe in, driven by modest NII growth (14.1% YoY) and strong non-interest income growth (23.4% YoY). The impact of higher provisioning in got offset by tax reversals. The growth in advances was modest at 5.5% YoY and 1.6% QoQ, as the Bank consolidated its loan growth. Focus on its SME and retail book is likely to continue. We expect a conservative loan growth of ~17% CAGR over F15 F17. Higher NIM, stable CASA and productivity: NIM improved 7bps QoQ to 5% in on the back of CASA share being stable at 22%. Deposit growth remains muted at 2.1%. A stable CASA share of 22% and higher credit-deposit of 81.2% are likely to support a stable NIM of 3.0% over F16 F17. On the back of better utilization from the existing setup, productivity has improved with core cost-to-income falling 76bps to 53.9% YoY, which is higher than its peers. Going forward, we expect costassets to remain steady at 2.0%. Asset quality trend is inconsistent; adequately capitalized: Slippages remained elevated during the quarter at 2.5% of advances, compared to 0.9%in. The Bank incrementally restructured Rs3.7bn of loans with the outstanding restructured book now at ~5.3% of the total loan book (higher than peers). As a result, annualized credit costs increased during the quarter to 2.0%. However, a capital adequacy 14.6% and Tier 1 capital of 13.6%, give comfort against additionally delinquencies. Valuations: On lower growth and productivity assumptions, we trim our estimates by 7% and 13% for F16 and F17e, respectively. On lower RoEs, we trim our target price to Rs560 from Rs630 earlier. At our target price, the stock would trade at 1.6x F16e and 1.4x F17e PBV. a) Better Productivity, b) steady NIMs and c) strong capital adequacy are likely to drive higher RoA of 1.0% by F17e. A consistent asset quality will drive the Bank s valuations going ahead. We maintain HOLD. Key Risks: Slower-than-expected credit growth and higher-than-expected slippage rate management. Financial summary Y/E March (Rs mn) F13 F14 F15e F16e F17e Net interest income 11,585 12,837 14,659 17,000 19,937 NIM 2.84 2.70 2.89 3.04 3.02 Operating profit 8,488 8,378 9,520 11,228 13,661 PAT 5,503 4,296 4,643 5,540 6,994 EPS 5 40.1 38.2 45.5 57.5 ABV 280.8 301.2 341.2 362.8 397.3 P/ABV (x) 1.4 1.2 1.1 1.0 P/E (x) 8.1 10.4 10.9 9.1 7.2 Dividend yield 3.4 3.6 3.9 3.9 4.8 RoE 19.0 13.4 12.3 12.7 14.9 RoAA 0.9 0.9 1.0 1.0 SBICAP Research on Bloomberg SBICAP <GO>, www.securities.com Please refer to our disclaimer given at the last page.
Stable NIM on the back of healthy NII growth Impact of higher provisioning got mitigated by tax reversals Quarterly financials Y/E March (Rs mn) YoY QoQ e Var. Interest earned 13,278 13,227 0.4 13,647 (2.7) 13,767 (3.6) Interest on advances 10,445 10,026 4.2 10,672 (2.1) 10,445 0.0 Income from investment 2,825 3,009 (6.1) 2,929 (3.5) 2,825 0.0 Int. on bal. with RBI/oth. 5 76 (92.9) 45 (87.9) 5 0.0 Other interest income 3 116 (97.2) 2 83.3 3 (0.0) Interest expended 9,304 9,744 (4.5) 9,736 (4.4) 9,741 (4.5) Net interest income 3,974 3,483 14.1 3,911 1.6 4,026 () Other income 1,798 1,457 23.4 1,471 22.2 1,559 15.3 Operating income 5,772 4,940 16.8 5,382 7.2 5,585 3.3 Operating expenses 3,085 2,848 8.3 2,755 12.0 2,785 10.8 Staff expenses 1,578 1,480 6.6 1,398 12.9 1,324 19.2 Operating profit 2,687 2,093 28.4 2,627 2.3 2,800 (4.0) Non-tax provisions 1,948 1,100 77.1 1,062 83.5 882 120.9 Profit before tax 738 993 (25.6) 1,565 (52.8) 1,918 (6) Taxes (640) (203) NM 427 NM 526 NM Tax rate (86.7) (20.5) NM 27.3 NM 27.4 NM Profit after tax 1,378 1,196 15.3 1,139 21.0 1,392 (1.0) Extraordinary income 0 0 NM 0 NM 0 NM Profit after tax 1,378 1,196 15.3 1,139 21.0 1,392 (1.0) Source:Company, SSLe Changes in estimates (Rs mn) Revised Old Change F16e F17e F16e F17e F16e F17e NII 17,000 19,937 17,608 21,197 (3.5) (5.9) Operating Profit 11,228 13,661 12,000 14,862 (6.4) (8.1) Net Profit 5,540 6,994 5,956 7,968 (7.0) (12.2) Business 940,020 1,128,243 999,352 1,219,427 (5.9) (7.5) Source: SSLe Advances growth to remain robust driving improvement in NII growth 38 35 34 33 4,000 4.0 29 20 11 31 33 31 31 29 35 28 27 27 27 32 26 23 23 23 24 29 28 30 30 32 28 29 27 27 26 27 21 25 24 12 15 20 22 22 15 14 12 12 8 6 (Rs mn) 3,100 2,200 1,300 2.8 3.4 3.4 3.3 3.7 3.3 3.0 3.0 2.8 2.8 2.5 2.6 2.7 2.7 2.7 3.5 3.0 2.5 10 2 7 5 4 Credit growth (LHS) Business Growth (RHS) CASA share stable above 42% 400 NII (LHS) Reported NIM (RHS) Improving core cost-to-income and profitability 2.0 (Rs mn) 96,000 77,000 58,000 39,000 22.4 19.9 24.0 23.5 24.2 25.3 25.0 23.3 22.6 21.6 20.4 19.2 20.0 2 20.5 19.3 18.7 19.2 19.4 20.6 21.0 21.0 21.8 2 26.0 23.5 21.0 18.5 100 80 60 40 1.8 1.8 1.6 1.6 1.0 1.6 1.4 1.9 1.9 2.0 1.0 20,000 CASA CASA share (RHS) 16.0 20 0.8 NPA coverage 0.6 GNPA as % of advances (RHS) May 2, 2015 2
PBV chart (1-year forward) 1,200 900 600 300 0 Mar-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 Jan-14 Nov-14 Price 0.7x x 1.9x 2.5x Historical PBV mean valuations (1-year forward) 2.5 2.0 The stock would trade at P/BV of 1.6x F16e and 1.4x F17e BV at our TP. (x) 1.0 0.5 Mar-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 Jan-14 Nov-14 Mean Deviation +1SD -1SD +2SD -2SD PE chart (1-year forward) 720 540 360 180 0 Mar-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 Jan-14 Nov-14 Prices 3x 6x 9x 12x May 2, 2015 3
Roaa decomposition Key Assumptions Y/E March F13 F14 F15e F16e F17e Y/E Mar (Rs mn) F16e F17e Net interest income 2.75 2.62 2.81 2.95 2.93 Balance Sheet Assumptions Other income 1.08 1.15 1.11 1.11 1.09 Credit Growth (%YoY) 15.1 20.1 -Fee-based income 0.66 0.71 0.73 0.79 0.78 Deposits Growth (%YoY) 17.6 20.0 -Treasury income 0.21 0.21 0.14 0.07 0.04 Investments Growth (%YoY) 21.4 18.0 Operating income 3.83 3.77 3.92 4.07 4.02 CD Ratio 78.8 78.9 Operating expenses 1.81 2.06 2.10 2.11 2.01 -Staff cost 0.82 1.08 1.05 1.04 0.99 Asset Quality Assumptions -Other operating expense 0.99 0.98 1.05 1.08 1.03 Slippage Ratio 0.7 0.7 Pre-provision profits (PPP) 2.02 1 1.82 1.95 2.01 Net Recovery Ratio 34.1 33.6 Provisions 0.29 0.90 0.92 0.67 0.58 Provisioning Cover 77.2 8 Profit before taxes 2 0.81 0.90 1.28 1.43 Taxes 0.42 (0.07) 0.01 0.32 0.40 Profit after taxes 1 0.88 0.89 0.96 1.03 Financials Income statement Ratios Y/E March (Rs mn) F13 F14 F15e F16e F17e Y/E March (Rs mn) F13 F14 F15e F16e F17e Interest earned 42,424 51,160 53,959 58,531 68,121 Earning ratios Interest expended 30,840 38,323 39,300 41,531 48,184 Yield on advances 12.3 12.2 12.0 12.0 12.0 Net interest income 11,585 12,837 14,659 17,000 19,937 Yield on investments 7.8 8.8 9.1 8.0 7.7 Growth 26.3 10.8 14.2 16.0 17.3 Cost of deposits 8.0 8.4 8.2 7.9 7.7 Other income 4,526 5,645 5,808 6,392 7,384 Spread 2.4 2.3 2.3 2.5 2.5 Fee-based income 2,785 3,481 3,829 4,518 5,332 NIM 2.8 2.7 2.9 3.0 3.0 Treasury income 883 1,033 750 400 300 C/I ratio 47.3 54.7 53.5 52.0 50.0 Other miscellaneous income 857 1,131 1,229 1,474 1,753 C/I (excl. treasury gains) 50.1 57.9 55.5 52.9 50.6 Operating income 16,110 18,482 20,467 23,392 27,322 Growth 27.1 14.7 10.7 14.3 16.8 Profitability ratios Operating expenses 7,622 10,104 10,948 12,164 13,661 RoE 19.0 13.4 12.3 12.7 14.9 Staff cost 3,436 5,279 5,471 5,960 6,694 RoA 0.9 0.9 1.0 1.0 Other operating expense 4,186 4,824 5,477 6,204 6,967 OPM 18.1 14.7 15.9 17.3 18.1 Pre-provision profits (PPP) 8,488 8,378 9,520 11,228 13,661 NPM 1 7.6 7.8 8.5 9.3 Growth 17.0 () 13.6 17.9 2 Provisions 1,234 4,423 4,805 3,842 3,947 Asset quality Profit before taxes 7,254 3,955 4,714 7,386 9,714 Gross NPAs 1.0 0.8 0.9 0.9 0.9 Taxes 1,751 (341) 72 1,847 2,720 Net NPAs 0.4 0.4 0.3 0.2 0.2 Tax rate 24.1 (8.6) 25.0 28.0 NPA coverage 62.0 49.9 70.7 77.2 8 Profit after taxes 5,503 4,296 4,643 5,540 6,994 NNPA/networth 3.5 4.2 2.3 1.9 Growth 9.7 (21.9) 8.1 19.3 26.3 Capital adequacy ratio Tier-I 1 11.6 14.2 1 12.0 Balance sheet Tier-II 1.0 2.1 2.3 Y/E March (Rs mn) F13 F14 F15e F16e F17e Total 14.4 12.6 15.9 15.2 14.3 Capital 1,072 1,072 1,216 1,216 1,216 Equity Multiplier (x) 14.6 15.3 13.8 1 14.4 Reserves & surplus 29,780 32,192 41,244 43,783 47,931 Networth 30,852 33,263 42,460 44,999 49,147 Per share data Deposits 386,530 437,577 446,903 525,636 630,764 O/s shares (mn.) 107 107 122 122 122 Borrowings 39,993 32,933 29,008 34,809 41,771 EPS 51 40 38 46 58 Other liabilities & provisions 8,872 10,259 12,193 14,285 16,330 Book value per share 288 310 349 370 404 Total liabilities 466,247 514,032 530,563 619,729 738,012 Adjusted book value 281 301 341 363 397 Dividend per share 14 15 16 16 20 Cash & Bank Balances 17,960 26,782 27,491 32,202 35,982 Advances 293,715 338,522 360,128 414,383 497,479 Valuations (x) Investments 138,373 132,470 127,730 155,063 182,921 P/E 8.1 10.4 10.9 9.1 7.2 Fixed assets 3,221 3,847 4,112 8,386 9,982 P/BV 1.4 1.2 1.1 1.0 Other assets 12,978 12,411 11,103 10,249 12,200 P/ABV 1.4 1.2 1.1 1.0 Total assets 466,247 514,032 530,563 620,282 738,565 Dividend yield 3.4 3.6 3.9 3.9 4.8 May 2, 2015 4
Recommendation History 650 550 BUY HOLD SELL Stock Price Target Price Date Stock Price TP Rec. 1-Apr-14 368 465 BUY 30-460 557 BUY 10-Nov-14 523 580 HOLD 1-551 630 HOLD 450 30-482 560 HOLD 350 250 Feb-13 Apr-13 Jun-13 Oct-13 Dec-13 Feb-14 Apr-14 Aug-14 Oct-14 Dec-14 Feb-15 Source: Bloomberg, SSLe SBICAP Securities Limited Corporate Office: Mafatlal Chambers, A-Wing, 2nd Floor, N. M. Joshi Marg, Lower Parel, Mumbai -400013. Tel.: 91-22-42273300/01 Fax: 91-22-42273335 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. 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