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For 3QFY2011, Bank of India posted robust net profit growth of 61.1% yoy to
`653cr, in line with our estimates of `669cr. Strong improvement in NIM coupled
with lower slippages were the key highlights of the result. We maintain our
Accumulate view on the stock.
Strong improvement in margins coupled with improvement in asset quality: For
3QFY2011, the bank’s net advances grew by 6.2% qoq and 22.8% yoy and
deposits registered growth of 4.8% qoq and 22.6% yoy. CASA deposits increased
by 22.2% yoy, driven by strong growth of 26.1% yoy in savings deposits. The
domestic CASA ratio declined to 32.3% from 33.2% in 2QFY2011. Reported NIM
improved by 28bp sequentially to 3.09% in 3QFY2011, due to a 31bp and 45bp
qoq increase in yield of advances and yield on investments, respectively. NII grew
by healthy 26.1% yoy to `1,776cr, well above our estimates. Annualised slippage
ratio for the quarter fell down to 1.1% compared to 1.7% for 1HFY2011 and
2.9% for FY2010. Asset quality improvement was partly aided by large
upgradations of `611cr, bulk of which were one-offs. The gross NPA ratio
improved to 2.4% from 2.6% in 2QFY2011 and net NPA ratio improved to 0.9%
from 1.1% in 2QFY2011. During 3QFY2011, the bank restructured advances
worth `719cr v/s `346cr in 2QFY2011 and `302cr in 1QFY2011.
Outlook and valuation: The bank’s RoEs are expected to improve over the coming
quarters on the back of declining NPA provisions (as witnessed in 3QFY2011). At
the CMP, the stock is trading at 7.5x FY2012E EPS of `61.6 and 1.4x FY2012E
ABV. We maintain our Accumulate view on the stock with a Target Price
of `500.
NIMs improve qoq due to higher yields and stable cost of funds
CASA deposits increased by 22.2% yoy, driven by strong growth in savings
deposits of 26.1% yoy and an 8.2% yoy increase in current account deposits. The
domestic CASA ratio declined to 32.3% from 33.2% in 2QFY2011. Global
reported NIM improved by 28bp sequentially to 3.09% in 3QFY2011, due to a
31bp and 45bp qoq increase in yield of advances and yield on investments,
respectively. The bank had raised its base rate by 100bp (one of the highest
amongst peers) to 9% during 3QFY2011. Cost of deposits for the bank declined
marginally by 2bp sequentially to 4.97%. Consequently, NII came in better than
our estimates, registering healthy 11.9% qoq and 32.9% yoy growth to `1,987cr.
For 4QFY2011, management expects to sustain NIM at current levels, with likely
pressure from 1HFY2012–when large part of deposits comes up for re-pricing.
Further, to sustain or improve NIMs, the bank is planning to focus on the midcorporate,
SME and retail segments, where the yields are relatively higher.
Healthy non-interest income growth due to higher recoveries
Non-interest income grew by 13.4% yoy to `648cr due to lower treasury gains
(down 12.2% yoy). However, non-interest income excluding treasury grew by
healthy 28.6% yoy to `462cr on the back of almost doubling of recoveries from
written-off accounts to `66cr and slightly muted 12.6% yoy growth in fee income.
Asset quality improves due to lower slippages and one-off
upgradation
During 3QFY2011, overall asset quality improved considerably with slippages
coming down to `477cr compared to average quarterly slippages of ~`720cr in
1HFY2011. Annualised slippage ratio for the quarter fell down to 1.1% compared
to 1.7% for 1HFY2011 and 2.9% for FY2010. Construction, engineering and gems
and jewellery were the major contributors to slippages from the corporate
segment. Improvement in asset quality was partly aided by large upgradations of
`611cr, bulk of which were one-offs. Consequently, gross and net NPA ratios
improved to 2.4% (2.6% in 2QFY2011) and 0.9% (1.1% in 1QFY2011),
respectively. The provision coverage ratio including technical write-offs improved to
74.5% from 70.0% in 2QFY2011. Going forward, management expects slippages
and upgradations to remain lower.
During 3QFY2011, the bank restructured advances worth `719cr, substantially
higher compared to restructuring of `346cr in 2QFY2011 and `302cr in
1QFY2011. Cumulative restructured assets increased to `10,348cr (5.4% of
advances and 63.6% of net worth) from `10,032cr in 2QFY2011. There were
relatively much lower slippages of `25cr from restructured advances in excess of
`1cr from more than `300cr in 1HFY2011. Cumulative slippages from
restructured advances increased to `1,891cr (18.3% of restructured advances).
During 3QFY2011, provisioning expenses decreased by 5.6% qoq and 13.6% yoy
on account of sharply lower NPA provisions, which declined sharply from the peak
of ~`660cr in 4QFY2010 to `124cr in the current quarter. The bank made a
one-off provision of ~`200cr for a derivatives contract, which it had entered into
with Lehmann Brothers, on account of the court ruling against the bank.
We have revised our estimates to reflect lower slippages and have accordingly
reduced our provision expenses estimates by 17.4% for FY2012.
Employee costs up due to higher provision for employee benefits
Operating expenses increased substantially by 27.1% qoq and 33.1% yoy to
`1,246cr on the back of a 35.1% yoy increase in employee costs and a 29.1% yoy
rise in other operating expenses. Employee costs increased substantially by 38.8%
qoq on account of higher provisioning for employee benefits. The cost-to-income
ratio increased to 47.3% from 41.6% in 2QFY2011 due to additional provision for
employee benefits.
Management had earlier estimated the second pension liability to be around
`2,500cr and, hence, was providing `125cr every quarter, assuming a five-year
amortisation. However, now management is expecting a liability of ~`4,000cr for
both the existing employees availing pension and for the second pension option.
As per the new estimate of liability, the bank had a shortfall of `150cr for
1HFY2011, which it has provided in 3QFY2011. In 3QFY2011, the bank provided
~`350cr in all for pension liability – `200cr for 3QFY2011 as per the new
estimate and `150cr for the shortfall for 1HFY2011. Hence, employee expenses
are expected to be lower by ~`150cr in 4QFY2011 compared to 3QFY2011.
Post the increase in estimated liability for the pension option, we have increased
our operating expenses estimates by 9.4% each for FY2011 and FY2012.
However, this is set off by lower provisioning expenses and accordingly the impact
on net profit estimates is relatively lesser (a 3.2% increase in FY2011 and 0.5%
increase in FY2012).
Sufficient capital adequacy
The bank is well capitalised with a CAR of 12.4% and tier-I capital of 8.0%
(forming 64.5% of the total CAR). Including profits for 9MFY2011, the CAR would
have been ~13.0%. With the Government of India’s holding at 64.5%, the bank
has adequate headroom to raise additional tier-I capital.
Investment arguments
Lower provisions to drive RoE
During the 2008 global meltdown, the bank faced severe asset-quality pressures
and reported a slippage rate of 2.9% in FY2010 (from 1.8% in FY2009). As a
result, NPA provision/assets increased to 0.7% in FY2010 from 0.3% in FY2009, in
turn exerting pressure on the bank’s RoE. However, as observed in the 3QFY2011
results, the bank has by and large overcome the worst in terms of asset quality.
Further, with improved operating environment, we expect NPA provision/assets to
decline sharply to 0.2% by FY2012, leading to RoE of 19.9% by FY2012 from
14.2% in FY2010.
Efficient capital management aiding RoE outlook
The bank’s CAR is at a comfortable level of 12.4%, with 8.0% tier-1 component
reinforced by strong internal generation that leaves comfortable headroom for
tier-II sources. The bank’s leverage is amongst the highest within peers, aided by
relatively higher use of tier-1 bonds and revaluation reserves. With the
government’s holding at 64.5%, the bank is not facing pronounced near-term
constraints on the equity front.
Reasonably high fee income with moderate funding mix
The bank’s international operations contribute a substantial 21.7% to the bank’s
advances. The international operations enable a wider spectrum of fee-based
services to the bank’s domestic corporate and retail customers, foreign currency
fund-based services to Indian corporates and savings products to the bank’s PIO
clients abroad. The bank has a relatively better funding mix with domestic CASA
ratio at 32.3% as of 3QFY2011.
Outlook and valuation
The bank’s RoEs are expected to improve over the coming quarters on the back of
declining NPA provisions (as witnessed in 3QFY2011). At the CMP, the stock is
trading at 7.5x FY2012E EPS of `61.6 and 1.4x FY2012E ABV. We maintain our
Accumulate recommendation on the stock with a Target Price of `500.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Bank of India – 3QFY2011 Result Update
Angel Broking maintains an Accumulate on Bank of India with a Target Price of Rs. 500.
For 3QFY2011, Bank of India posted robust net profit growth of 61.1% yoy to
`653cr, in line with our estimates of `669cr. Strong improvement in NIM coupled
with lower slippages were the key highlights of the result. We maintain our
Accumulate view on the stock.
Strong improvement in margins coupled with improvement in asset quality: For
3QFY2011, the bank’s net advances grew by 6.2% qoq and 22.8% yoy and
deposits registered growth of 4.8% qoq and 22.6% yoy. CASA deposits increased
by 22.2% yoy, driven by strong growth of 26.1% yoy in savings deposits. The
domestic CASA ratio declined to 32.3% from 33.2% in 2QFY2011. Reported NIM
improved by 28bp sequentially to 3.09% in 3QFY2011, due to a 31bp and 45bp
qoq increase in yield of advances and yield on investments, respectively. NII grew
by healthy 26.1% yoy to `1,776cr, well above our estimates. Annualised slippage
ratio for the quarter fell down to 1.1% compared to 1.7% for 1HFY2011 and
2.9% for FY2010. Asset quality improvement was partly aided by large
upgradations of `611cr, bulk of which were one-offs. The gross NPA ratio
improved to 2.4% from 2.6% in 2QFY2011 and net NPA ratio improved to 0.9%
from 1.1% in 2QFY2011. During 3QFY2011, the bank restructured advances
worth `719cr v/s `346cr in 2QFY2011 and `302cr in 1QFY2011.
Outlook and valuation: The bank’s RoEs are expected to improve over the coming
quarters on the back of declining NPA provisions (as witnessed in 3QFY2011). At
the CMP, the stock is trading at 7.5x FY2012E EPS of `61.6 and 1.4x FY2012E
ABV. We maintain our Accumulate view on the stock with a Target Price
of `500.
Advances growth below industry; deposits growth higher
For 3QFY2011, the bank’s net advances grew by 6.2% qoq and 22.8% yoy, which
was lower than industry growth of 9.2% qoq and 24.4% yoy. Deposits registered
growth of 4.8% qoq and 22.6% yoy. Domestic gross advances grew by 4.3% qoq
and 22.9% yoy to `1,50,903cr and the overseas gross loan book registered strong
growth of 13.8% qoq and 22.4% yoy to `41,851cr.
Demand for domestic loans was primarily driven by corporates (up 47.2% yoy).
Amongst corporates, demand was strong from the infrastructure segment
(accounting for 13.3% of the domestic loan book), which grew by 54.1% yoy, and
the rubber and plastic products segment, which grew by 56.7% yoy. Agricultural
advances increased by 16.4% yoy, while the SME segment registered a decline of
9.1% yoy. Growth in retail advances was sluggish both on a qoq and yoy basis.
NIMs improve qoq due to higher yields and stable cost of funds
CASA deposits increased by 22.2% yoy, driven by strong growth in savings
deposits of 26.1% yoy and an 8.2% yoy increase in current account deposits. The
domestic CASA ratio declined to 32.3% from 33.2% in 2QFY2011. Global
reported NIM improved by 28bp sequentially to 3.09% in 3QFY2011, due to a
31bp and 45bp qoq increase in yield of advances and yield on investments,
respectively. The bank had raised its base rate by 100bp (one of the highest
amongst peers) to 9% during 3QFY2011. Cost of deposits for the bank declined
marginally by 2bp sequentially to 4.97%. Consequently, NII came in better than
our estimates, registering healthy 11.9% qoq and 32.9% yoy growth to `1,987cr.
For 4QFY2011, management expects to sustain NIM at current levels, with likely
pressure from 1HFY2012–when large part of deposits comes up for re-pricing.
Further, to sustain or improve NIMs, the bank is planning to focus on the midcorporate,
SME and retail segments, where the yields are relatively higher.
Healthy non-interest income growth due to higher recoveries
Non-interest income grew by 13.4% yoy to `648cr due to lower treasury gains
(down 12.2% yoy). However, non-interest income excluding treasury grew by
healthy 28.6% yoy to `462cr on the back of almost doubling of recoveries from
written-off accounts to `66cr and slightly muted 12.6% yoy growth in fee income.
Asset quality improves due to lower slippages and one-off
upgradation
During 3QFY2011, overall asset quality improved considerably with slippages
coming down to `477cr compared to average quarterly slippages of ~`720cr in
1HFY2011. Annualised slippage ratio for the quarter fell down to 1.1% compared
to 1.7% for 1HFY2011 and 2.9% for FY2010. Construction, engineering and gems
and jewellery were the major contributors to slippages from the corporate
segment. Improvement in asset quality was partly aided by large upgradations of
`611cr, bulk of which were one-offs. Consequently, gross and net NPA ratios
improved to 2.4% (2.6% in 2QFY2011) and 0.9% (1.1% in 1QFY2011),
respectively. The provision coverage ratio including technical write-offs improved to
74.5% from 70.0% in 2QFY2011. Going forward, management expects slippages
and upgradations to remain lower.
During 3QFY2011, the bank restructured advances worth `719cr, substantially
higher compared to restructuring of `346cr in 2QFY2011 and `302cr in
1QFY2011. Cumulative restructured assets increased to `10,348cr (5.4% of
advances and 63.6% of net worth) from `10,032cr in 2QFY2011. There were
relatively much lower slippages of `25cr from restructured advances in excess of
`1cr from more than `300cr in 1HFY2011. Cumulative slippages from
restructured advances increased to `1,891cr (18.3% of restructured advances).
During 3QFY2011, provisioning expenses decreased by 5.6% qoq and 13.6% yoy
on account of sharply lower NPA provisions, which declined sharply from the peak
of ~`660cr in 4QFY2010 to `124cr in the current quarter. The bank made a
one-off provision of ~`200cr for a derivatives contract, which it had entered into
with Lehmann Brothers, on account of the court ruling against the bank.
We have revised our estimates to reflect lower slippages and have accordingly
reduced our provision expenses estimates by 17.4% for FY2012.
Employee costs up due to higher provision for employee benefits
Operating expenses increased substantially by 27.1% qoq and 33.1% yoy to
`1,246cr on the back of a 35.1% yoy increase in employee costs and a 29.1% yoy
rise in other operating expenses. Employee costs increased substantially by 38.8%
qoq on account of higher provisioning for employee benefits. The cost-to-income
ratio increased to 47.3% from 41.6% in 2QFY2011 due to additional provision for
employee benefits.
Management had earlier estimated the second pension liability to be around
`2,500cr and, hence, was providing `125cr every quarter, assuming a five-year
amortisation. However, now management is expecting a liability of ~`4,000cr for
both the existing employees availing pension and for the second pension option.
As per the new estimate of liability, the bank had a shortfall of `150cr for
1HFY2011, which it has provided in 3QFY2011. In 3QFY2011, the bank provided
~`350cr in all for pension liability – `200cr for 3QFY2011 as per the new
estimate and `150cr for the shortfall for 1HFY2011. Hence, employee expenses
are expected to be lower by ~`150cr in 4QFY2011 compared to 3QFY2011.
Post the increase in estimated liability for the pension option, we have increased
our operating expenses estimates by 9.4% each for FY2011 and FY2012.
However, this is set off by lower provisioning expenses and accordingly the impact
on net profit estimates is relatively lesser (a 3.2% increase in FY2011 and 0.5%
increase in FY2012).
Sufficient capital adequacy
The bank is well capitalised with a CAR of 12.4% and tier-I capital of 8.0%
(forming 64.5% of the total CAR). Including profits for 9MFY2011, the CAR would
have been ~13.0%. With the Government of India’s holding at 64.5%, the bank
has adequate headroom to raise additional tier-I capital.
Investment arguments
Lower provisions to drive RoE
During the 2008 global meltdown, the bank faced severe asset-quality pressures
and reported a slippage rate of 2.9% in FY2010 (from 1.8% in FY2009). As a
result, NPA provision/assets increased to 0.7% in FY2010 from 0.3% in FY2009, in
turn exerting pressure on the bank’s RoE. However, as observed in the 3QFY2011
results, the bank has by and large overcome the worst in terms of asset quality.
Further, with improved operating environment, we expect NPA provision/assets to
decline sharply to 0.2% by FY2012, leading to RoE of 19.9% by FY2012 from
14.2% in FY2010.
Efficient capital management aiding RoE outlook
The bank’s CAR is at a comfortable level of 12.4%, with 8.0% tier-1 component
reinforced by strong internal generation that leaves comfortable headroom for
tier-II sources. The bank’s leverage is amongst the highest within peers, aided by
relatively higher use of tier-1 bonds and revaluation reserves. With the
government’s holding at 64.5%, the bank is not facing pronounced near-term
constraints on the equity front.
Reasonably high fee income with moderate funding mix
The bank’s international operations contribute a substantial 21.7% to the bank’s
advances. The international operations enable a wider spectrum of fee-based
services to the bank’s domestic corporate and retail customers, foreign currency
fund-based services to Indian corporates and savings products to the bank’s PIO
clients abroad. The bank has a relatively better funding mix with domestic CASA
ratio at 32.3% as of 3QFY2011.
Outlook and valuation
The bank’s RoEs are expected to improve over the coming quarters on the back of
declining NPA provisions (as witnessed in 3QFY2011). At the CMP, the stock is
trading at 7.5x FY2012E EPS of `61.6 and 1.4x FY2012E ABV. We maintain our
Accumulate recommendation on the stock with a Target Price of `500.
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