Bank of India 3QFY11 – Fully valued; reiterate Sell : Anand Rathi

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Bank of India
3QFY11 – Fully valued; reiterate Sell
Bank of India (BoI) registered 61.1% yoy net profit growth, led
by healthy NII growth and lower provisions. We raise FY11/12
EPS estimates 14.7/12.2% on higher business growth
assumptions. Due to better RoE, we raise our target price to
`428 from `380. Yet we reiterate Sell as we expect modest core
earnings and high NPA provisions to keep RoE in check.

 Modest business growth; CASA dips. Yoy growth rate in credit
(22.8%) and deposits (22.6%) improved over previous quarters.
Domestic CASA share dipped 12bps yoy to 32.3%, one of the
lowest among large PSU banks. Yet NIM rose 49bps yoy to 3.1%,
led by 14bps rise in credit-to-deposits to 76.3%. We raise our
FY11e and FY12e NII 14.7% and 12.2% respectively.
 Asset quality improves; slippages high. Gross NPAs fell 6.7%
qoq, with NPA coverage at 74.5%. However, slippages (1.1% of
loans) are still high. We expect high credit costs in FY11, given
that restructured loans comprise a high 5.4% (`103.5bn) as well as
the bank’s inconsistent slippage in the past.
 RoE to recover, albeit lower than past highs. Management
shift in focus to profitability from aggressive growth could drive
RoE, led by a marginally better NIM and normalized credit costs.
Yet, BoI’s RoE is unlikely to touch its past 6-year average of 21%.
 Valuation and risks. At our price target, BoI would trade at 1.5x
FY12e and 1.1x FY13e ABV. Key risk: Lower credit costs due to
higher-than-expected NPA recoveries.


Results review
BoI reported 61.1% yoy net profit growth, led by healthy NII growth
and lower provisions. We raise our FY11e/12e EPS 14.7/12.2% on
account of higher business growth assumptions. Owing to better
RoE, we raise our target price to `428 from `380. Yet we reiterate a
Sell as we expect the modest core earnings and high NPA
provisions to check RoE.
Improving business growth
Yoy growth rates in credit (22.8%) and deposits (22.6%) have improved
relative to previous quarters. While domestic advances rose 4% qoq to
`1,509bn, international loan advances grew faster (14% qoq) to `419bn.
International advances constitute 21.7% of advances, at similar levels as
3QFY10. International deposits as a percentage of total deposits declined
4bps to 15%. Led by a slightly better growth in advances, credit-to-deposit
expanded 110bps qoq to 76.3% in 3QFY11.


CASA declines, yet NIM rises
Savings-account deposits grew a healthy 26.1% yoy (2.8% qoq). However,
owing to low systemic liquidity, current-account deposits declined 8.2%
qoq, leading to a 9bps decline in CASA share to 27.4%. Yet NIM
improved 49bps yoy to 3.1%, led by a 14bps rise in credit-to-deposit to
76.3%. This resulted in a better NII performance (32.9% yoy). We raise
our FY11e/FY12e NII 14.7/12.2% owing to higher business growth
assumptions. We expect NIM of 2.69% in FY11e and 2.74% in FY12e.
We estimate the bank’s business to record 19.4% CAGR over FY10-13,
with advances and deposits CAGR of 20% and 18.9% respectively.


Better fee income; productivity declines qoq
Better credit growth led to core fee-income growing 30.2% yoy. However,
trading profits were lower than in 3QFY10, declining 56.6% yoy to
`592m. In 9MFY10, they largely aided profit growth and comprised
18.2% of operating profits (4.7% in 9MFY11); ahead, these could
diminish if yields harden, thereby squeezing profitability.
Productivity suffered qoq, led by a steep rise in employee pension and
gratuity provisions, with the bank’s core cost-to-income rising 618bps qoq
to 48.4%. The steep rise is attributed to `3.5bn of employee provisions in
3QFY11 compared with `2.4bn in 1HFY11. While the actuarial estimate
of pension liability has not been finalized, management expects it to be
~`40-45bn, and intends to provide for it in the next five years. Currently,
the bank has provision of `6.6bn for employee pensions.


Asset quality improves, though slippages still high
Gross NPAs fell 6.7% qoq, with NPA coverage at 74.5%. However,
slippages (1.1% of loans) are still high. Given that restructured loans
comprise a high 5.4% (`103.5bn) and given the bank’s inconsistent
slippage in the past, we expect high credit costs in FY11.
RoE to recover, albeit lower than past highs
Management shift in focus to profitability from aggressive growth could
drive RoE, led by a marginally better NIM and normalized credit costs.
Yet, BoI’s RoE is unlikely to touch its past 6-year average of 21%.


Valuation
At the current market price, the stock trades at 1.5x FY12e PABV and 1.1x
FY13 estimates. We raise our target price to `428 from `380 (1.2x FY12e
BV). Our target is based on the two-stage dividend-discount model – CoE:
13.4%; beta: 0.85; Rf: 7.5%


Risks
Faster-than-expected economic growth in FY11 and FY12, leading to
credit growth being higher than estimated, and lower NPAs.
Less dependence on bulk deposits and faster accretion in low-cost
deposits, leading to NIMs being better than estimated.
Lower credit costs due to higher-than-expected NPA recoveries could
lead to earnings growth being better than estimates.


Financials
We introduce FY13 estimates and expect 20% CAGR in the loan
book over FY10-13e. We expect 36.8% CAGR in net profit over the
same period.