The Bank’s Net Interest Margins (NIMs) for the recently concluded quarter were better than expected, with Net Interest Income (NII) growing116% to Rs113 crore.
Fee Income fell 11% sequentially, as Treasury Income (including Forex Derivatives) declined from Rs38 crore in Q4FY2008 to Rs25 crore in Q1FY2009, partly on account of the Forex Derivatives business more or less unraveling in Q4FY2008.
Overall, Fee income grew 24% y-o-y to Rs94 crore on the back of sustained improvement in income from the Transaction Banking Division (including traditional Fee sources, Cash Management, etc).
The net profit surged 51% to Rs54 crore, after five quarters of over 100% y-o-y growth, as MTM losses of around Rs22 crore took their toll. Pre-Provisioning Profit grew a healthy 87% to Rs114 crore, higher than expectations due to high NIMs and Investment Banking Fees and lower costs on account of ongoing cost-saving measures.
At the current market price, the stock is trading at 10.7x FY2010E EPS of Rs11.9 and 1.7x FY2010E Adjusted Book Value of Rs73.7.
We had recently reduced our target price for the stock mainly on account of the deteriorating macro environment and also due to the extant risks and uncertainties in the Bank’s Forex Derivatives and Capital Market-related businesses.
We also took into account that further Equity capital-raising was likely to be delayed by a year, consequently bringing down our Book Value estimates sharply by about Rs14 per share.
The Bank is evidently in a cost-saving and capital-conservation mode, which has set back its expansion plans possibly by a year. However, we believe the medium-term structural growth potential is intact, albeit there will be some moderation in the near term. We maintain a BUY on the stock, with a 12-month target price of Rs166.