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Bank of India (BOI)
Banks/Financial Institutions
Margins expand; NPLs decline. BoI reported strong 3Q results with better margins
and improved asset quality. The bank used the higher earnings during the quarter from
margin expansion to provide for revised pension benefits (costs are yet to be finalized)
and specific provisions for a derivative contract (related to Lehman Brothers). The
management guided of sustaining current margins and further improving the asset
quality. Stock trades at 1.4X PBR and 7X PER FY2012E earnings. However, earnings
have lacked consistency in the past few quarters. Retain ADD with a TP of `560.
Balance sheet improvement positive; consistency critical
Volatility in BOI’s earnings continue – was on the positive side this quarter, with asset quality
showing improvement and margins expanding sequentially. Lower slippages inspire confidence
and the management is guiding for even better trends going forward. Valuations at 1.4X FY2012E
PBR and 7X PER valuations are inexpensive delivering RoE at 20% levels, but are also now in line
with larger public banks. However, lack of consistency in earnings remains a key risk. We have
revised our earnings downwards by 9% in FY2011E to factor the higher specific provisions
(derivative exposure) but maintain our estimates for FY2012-13E and retain ADD rating.
Asset quality shows improvement with lower slippages and one-off recoveries
Gross NPLs for the quarter declined by 7% qoq driven by one-off upgradations during the quarter.
Gross NPLs were at `45.4 bn as of December 2010 (2.4% of loans, down 7% qoq) while net NPLs
were at `16.6 bn (0.9% of loans, down 20% qoq). Provision coverage, including technical writeoff,
is at 75% in 3QFY11 as compared to 70% in September 2010. Slippages for the quarter were
at 1% and fairly diversified across segments. Upgradations from few specific accounts helped
decline in overall NPLs. Outstanding restructured book was flat qoq at `104 bn (5.4% of loans,
20% slippages). Management guides that slippages are likely to remain below 1% over next few
quarters.
Margins expand by 28 bps qoq, driven by domestic business
Margins bounced back in the quarter by 28 bps to 3.1%, having declined against industry trends
in the previous quarter. It was driven by the domestic business where underlying cost of deposits
has declined qoq (4 bps) while lending yields increased (31 bps qoq) as the bank took hikes during
the quarter. NIMs in the domestic book are at 3.5% (3.2% in 2QFY11) while the international
margins improved by 8 bps qoq to 1.5%. In line with the general industry trend, we expect NIMs
to compress by 20 bps in 4Q and 10 bps in FY2012E. Here again the management highlighted
that they will strive to maintain margins at close to 3%. Net interest income (NII) increased by 33%
yoy to `19.9 bn in 3QFY11. CD ratio (domestic) is comfortable at 70% (flat qoq).
Business growth in line with industry; CASA ratio declines 90 bps to 32%
Loan book as of December 2010 was at `1.9 tn (up 23% yoy) with a balanced growth
between the domestic (23% yoy) and international loans (22%). Focus on the domestic
balance sheet continues to remain in large corporate segment which grew by 47% yoy.
Retail and SME segment continues to witness subdued business performance. Deposits grew
23% yoy to `2.5 tn and overall CASA growth was at 21% yoy at `693 bn with savings
deposits growing by 26% yoy. Domestic CASA ratio declined by 90 bps qoq to 33%.
Higher pension provisions result in sharp rise in staff expenses
Cost-income ratio increased by 570 bps qoq to 47% as the bank made use of the stronger
NII to make higher provisions for pension. The bank is yet to estimate pension liability but
has a total provision of `6.6 bn. The bank had given an estimate of `25 bn as pension
liability. We are factoring staff costs to increase by 13% in FY2012E.
Other operational highlights for the quarter
BoI’s non-interest income increased by 13% yoy to `6.5 bn in 3QFY11 mainly due to
lower treasury income. Core fee income (ex treasury and recoveries) grew by 21% yoy. A
lower base effect resulted in strong growth in foreign exchange income 70% yoy and
recoveries (98% yoy).
The bank has provided `2 bn for a ruling against the bank on a derivative contract whose
counterparty was Lehman Brothers. There are two other pending judgments but the bank
has already made full provision against the same.
The bank is reasonably well capitalized with tier-1 capital at 8.0% (excluding profits for
9MFY11) and overall capital adequacy at 12.4%.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Bank of India (BOI)
Banks/Financial Institutions
Margins expand; NPLs decline. BoI reported strong 3Q results with better margins
and improved asset quality. The bank used the higher earnings during the quarter from
margin expansion to provide for revised pension benefits (costs are yet to be finalized)
and specific provisions for a derivative contract (related to Lehman Brothers). The
management guided of sustaining current margins and further improving the asset
quality. Stock trades at 1.4X PBR and 7X PER FY2012E earnings. However, earnings
have lacked consistency in the past few quarters. Retain ADD with a TP of `560.
Balance sheet improvement positive; consistency critical
Volatility in BOI’s earnings continue – was on the positive side this quarter, with asset quality
showing improvement and margins expanding sequentially. Lower slippages inspire confidence
and the management is guiding for even better trends going forward. Valuations at 1.4X FY2012E
PBR and 7X PER valuations are inexpensive delivering RoE at 20% levels, but are also now in line
with larger public banks. However, lack of consistency in earnings remains a key risk. We have
revised our earnings downwards by 9% in FY2011E to factor the higher specific provisions
(derivative exposure) but maintain our estimates for FY2012-13E and retain ADD rating.
Asset quality shows improvement with lower slippages and one-off recoveries
Gross NPLs for the quarter declined by 7% qoq driven by one-off upgradations during the quarter.
Gross NPLs were at `45.4 bn as of December 2010 (2.4% of loans, down 7% qoq) while net NPLs
were at `16.6 bn (0.9% of loans, down 20% qoq). Provision coverage, including technical writeoff,
is at 75% in 3QFY11 as compared to 70% in September 2010. Slippages for the quarter were
at 1% and fairly diversified across segments. Upgradations from few specific accounts helped
decline in overall NPLs. Outstanding restructured book was flat qoq at `104 bn (5.4% of loans,
20% slippages). Management guides that slippages are likely to remain below 1% over next few
quarters.
Margins expand by 28 bps qoq, driven by domestic business
Margins bounced back in the quarter by 28 bps to 3.1%, having declined against industry trends
in the previous quarter. It was driven by the domestic business where underlying cost of deposits
has declined qoq (4 bps) while lending yields increased (31 bps qoq) as the bank took hikes during
the quarter. NIMs in the domestic book are at 3.5% (3.2% in 2QFY11) while the international
margins improved by 8 bps qoq to 1.5%. In line with the general industry trend, we expect NIMs
to compress by 20 bps in 4Q and 10 bps in FY2012E. Here again the management highlighted
that they will strive to maintain margins at close to 3%. Net interest income (NII) increased by 33%
yoy to `19.9 bn in 3QFY11. CD ratio (domestic) is comfortable at 70% (flat qoq).
Business growth in line with industry; CASA ratio declines 90 bps to 32%
Loan book as of December 2010 was at `1.9 tn (up 23% yoy) with a balanced growth
between the domestic (23% yoy) and international loans (22%). Focus on the domestic
balance sheet continues to remain in large corporate segment which grew by 47% yoy.
Retail and SME segment continues to witness subdued business performance. Deposits grew
23% yoy to `2.5 tn and overall CASA growth was at 21% yoy at `693 bn with savings
deposits growing by 26% yoy. Domestic CASA ratio declined by 90 bps qoq to 33%.
Higher pension provisions result in sharp rise in staff expenses
Cost-income ratio increased by 570 bps qoq to 47% as the bank made use of the stronger
NII to make higher provisions for pension. The bank is yet to estimate pension liability but
has a total provision of `6.6 bn. The bank had given an estimate of `25 bn as pension
liability. We are factoring staff costs to increase by 13% in FY2012E.
Other operational highlights for the quarter
BoI’s non-interest income increased by 13% yoy to `6.5 bn in 3QFY11 mainly due to
lower treasury income. Core fee income (ex treasury and recoveries) grew by 21% yoy. A
lower base effect resulted in strong growth in foreign exchange income 70% yoy and
recoveries (98% yoy).
The bank has provided `2 bn for a ruling against the bank on a derivative contract whose
counterparty was Lehman Brothers. There are two other pending judgments but the bank
has already made full provision against the same.
The bank is reasonably well capitalized with tier-1 capital at 8.0% (excluding profits for
9MFY11) and overall capital adequacy at 12.4%.
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