Bank of India: Key risks: JPMorgan

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Bank of India
Asset quality issues seem to be persistent – is there a structural problem with
underwriting? Slippages have been highest for Bank of India among larger PSU
banks over the last 5-6 quarters, with credit costs of ~110bps in FY10 v/s 50-60bps
for peers. Though slippages have come off from FY10 levels, gross slippages are still
high at 1.8%. These asset quality issues could also be a factor of high loan growth in
the past, when underwriting standards may have been compromised. There is a risk
that BOI’s NPL problems have a structural element and may not improve along with
the strengthening economy.


Capital may become an issue: Capital adequacy for most PSU banks are low at
Tier-1 <9.0% and with increasing threshold for capital requirements globally. With a
threshold tier-1 capital of 8.0-8.5%, near-term capital would not be a constraint but
going into FY12, BOI's Tier-1 could also approach threshold levels. High
government stake at 64.5% provides the comfort but a cap raise is possible over the
next 1-2 years and that would depress return ratios.

International book susceptible to rising rates: International exposure constitutes
21% of total loan book and has been a drag on overall margins in FY10. Margins
have improved over the last 2 quarters in the international book due to rising yields,
but margins remain susceptible to rising rates.