IIFL on Bank of India: Downgrade to REDUCE

Bank of India: Downgrade to REDUCE
Over the past three months, Bank of India’s (BOI) stock has risen by 52%, outperforming key
benchmarks such as the Sensex and Bankex, which have risen by 14% and 30%, respectively. The
stock trades at 1.7x FY12ii book; it no longer trades at a discount to its peers. Although quarterly
results are likely to be strong, owing to the low base of last year, the strong price performance
suggests that such expectations are priced in the current valuations. At this juncture, we prefer SBI
and PNB, which offer a better return profile. We downgrade BOI from BUY to REDUCE.
Valuations in-line with larger peers: Having risen 52% over the past three months, we believe BOI’s
stock discounts its improving fundamentals, mainly rising NIM and falling credit costs. The stock now trades
at 1.7x FY12ii book, and no longer trades at a significant discount to its larger peers such as SBI (1.8x
FY12ii book) and PNB (1.7x FY12ii book).
Weaker customer franchise likely to limit profitability improvements: BOI has a weaker deposit
franchise among larger banks—CASA deposit ratio of 32%. This is likely to limit improvements in profitability
ratios. Moreover, BOI’s capitalisation levels are weaker; FY12ii assets/equity ratio is high at 21x and net
NPA/equity ratio is at 84% (as at end FY10). We believe inferior profitability and weaker capitalisation would
likely become a growth constraint over the medium term.
Downgrade from BUY to REDUCE: Even though the bank would continue to deliver robust performance
(37% earnings CAGR over FY10-13ii), current valuation suggests this is priced into expectations. BOI’s
return ratio and risk profile will likely remain inferior to its larger peers such as SBI and PNB. Moreover,
these banks have a consistent record of performance and hence deserve to trade at a premium, in our view.