Bank of India - High provisions and lower treasury gains :: Kotak Sec,

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Bank of India (BOI)
Banks/Financial Institutions
High provisions and lower treasury gains result in lower-than-expected earnings.
BoI earnings fell short of expectations mainly due to lower-than-expected treasury gains
and higher provisions (floating provisions to meet 70% coverage). NIMs declined
marginally by 8 bps to 2.8% due to higher funding costs. Fresh slippages emerged
during the quarter, but recoveries are likely to be very strong in 2HFY11E. Maintain
ADD rating on the stock with a target price of `580.


Slippages increase; recoveries to improve in 2H
The past few quarters have seen earnings volatility increase for BoI, especially given the rise in
fresh slippages (higher provisions and de-recognition of interest income) and lower treasury
profits. Margins look to have stabilized with an upward bias but rising funding costs indicate that
BoI would need to actively raise interest rates to keep them at current levels. Stickiness in asset
quality is a concern but we expect upgradations/recoveries to improve in the coming few quarters.
At 1.6X FY2012E PBR, valuations are inexpensive delivering RoE at 20% levels but we should see
improved confidence as asset quality shows stability. Post the 2Q earnings, we are broadly
maintaining our estimates for FY2011E and FY2012E.
NPLs flat sequentially but write-offs higher during the quarter
Gross NPLs for the quarter were flat qoq but underlying asset quality continues to see higher
slippages while a lower recovery/upgradation indicates stickiness in the NPL portfolio. Higher writeoffs
during the quarter have resulted in sustaining NPLs during the quarter. Gross NPLs were `48.7
bn as of September 2010 (up 1% qoq and 24% yoy) while net NPLs were at `20.7 bn (up 29%
yoy). Provision coverage, including technical write-off, is at 70% in 2QFY11. Slippages for the
quarter were at 1.8% mainly from textiles, engineering and chemicals. Upgradation of NPLs from
airline sector is expected in the next quarter as the restructuring package was not completed in
2QFY11.
Restructured portfolio stable qoq; overall slippage at 20% of loans
Outstanding restructured book was flat qoq at `100 bn (5.4% of loans). Total slippages stand the
highest in the industry at about 20% of the restructured book. The quarter saw about `3 bn
slippages from the restructured book.