BOB.BO, BOB IN
Capital infusion: concerns on capital constraints
recede but infusion EPS and ROE dilutive
• Large capital infusion by the government: According to CNBC
reports, the Indian government has infused ~Rs100bn in PSU banks with
stakes of <57-58%. BOB has received Rs35bn and assuming current
market prices, the infusion would lead to ~10% dilution and would take
the government’s stake in BOB from 54% to 58% and lead to ~175bps
increase in BOB’s Tier 1.
• Positives - No constraints on capital now: The capital infusion
addresses concerns about capital constraints not only in the near term but
also longer term, as the increase in the government’s stake to 58% leaves
leeway for further capital issuance without government help in the
future.
• Negatives: EPS and ROE dilutive, capital marginally higher than
required: Assuming current prices, EPS dilution would be ~6% over
FY11-12E and ROEs would be brought down by ~250bps to ~20-20.5%
for FY12-13. Given strong internal capital generation, we estimate that it
would take more than three years for BOB to leverage up again, leading
to lower ROEs over that period.
confirmation of the same, we assume the infusion to be 100% equity.
Given very low dilution for PNB, we would prefer PNB vs. BOB as the
capital infusion would widen ROE differentials for BOB vs. PNB from
200bps earlier to 500bps now and valuations would be on par on a post
diluted book basis.
• Maintain Overweight: Though the news is positive for PSU banks in
general as it addresses their capital issues, we believe for BOB the large
dilution is at best neutral, given the large EPS and ROE dilution. We
continue with our Overweight on BOB, given superior asset quality but
would prefer PNB for return ratio differentials post the capital infusion.
