BNP Paribas: downgrading Bank of India to REDUCE

We are downgrading Bank of India to
REDUCE (from BUY) as it has achieved
our TP and looks richly valued to us from
a FY12 perspective. Our FY11 & FY12
outlook is detailed below.
Outlook – Our loan-growth estimate is
22% for FY11 and 24% for FY12. We
expect an average NIM of 2.5% for FY11
and 2.6% for FY12, flat with respect to
FY10. We are factoring in loan loss
provisions of 67bps in FY11 and 80bps in
FY12, compared with 113bps in FY10.
Downgrade as our thesis has
played out
We turned positive on BOI on 2 July 2010 (read our note ‘Phoenix Rising’
dated 2 July 2010) largely on the back of a sharp improvement in its
credit-cost profile. Since that time stock price of BOI has moved up by
55% compared to 17% for Sensex and 34% for Bankex. We expected the
bank to benefit from strong NPL recovery efforts. After a fantastic
1QFY11, we met Chairman Mr. Alok Mishra and came away confident
about the bank’s ability to contain GNPL growth. We accordingly factored
in a significant decline in loan loss provisions for FY11 and FY12 – our
LLPs decline from 113bps in FY10 to 67bps in FY11 and 80bps in FY12.
Despite factoring in these benefits, we believe the run up in the stock
price has been excessive and we recommend investors to book profits.
Valuation
At our revised TP of INR500.00 (from INR480.00), the stock would trade
at 1.6x our FY12E adjusted BV for an ROE of 22.3%. Our target price is
based on a three-stage residual income model, which assumes risk-free
rate of 8%, equity risk premium of 6%, beta of 1.5, terminal growth of 4%
and terminal COE of 10%. Risks to TP: lower-than-expected slippages,
higher credit growth, and continued inflow of global liquidity into the
stock.