Bank of India 2QFY11 – CASA share improves, but slippages rise; Sell :: Anand Rathi

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Bank of India
2QFY11 – CASA share improves, but slippages rise; Sell
 Profit up 91%. Bank of India reported 91% yoy growth in net
profit, led by better productivity and lower NPA provisions. We
retain Sell as we expect the slow business growth, modest core
earnings and high NPA provisions to restrain RoE.
 Steady business growth; CASA improves. Business growth of
22% yoy was led by improving growth in credit (up 22.7%) and
deposits (21.3%). NIM rose 24bps yoy, but fell 9bps qoq, to
2.81%. CASA share rose 136bp yoy to 33.5%, yet remains one of
the lowest among large PSU banks. Modest credit growth and low
CASA share are likely to keep NIM under pressure.
 Asset quality weakens; slippages still high. Gross NPAs rose
1.6% qoq. NPA coverage, including technical write-offs, is 70%,
meeting RBI’s requirement. However, slippages have increased
qoq, from 1.4% to 1.9% of loans. So far, 18% of restructured
loans have turned NPAs. Given that a high 4.7% (`86bn, 55% of
equity) are restructured loans and that we expect some would
default, we estimate credit costs in FY11 to be high.
 RoE to recover, but lower than historical highs. Shift of
management focus from aggressive growth to profitability could
drive RoE, led by a marginally better NIM and normalised credit
costs. Yet, BoI’s RoE is unlikely to touch its past six-year average
of 21%. Hence, future valuations could be capped.
 Valuation. At our target price, BoI would trade at 1.5x FY11e
and 1.2x FY12e ABV.