Bank of India - Strong results; Asset quality concerns recedes:: Emkay

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Bank of India

Strong results; Asset quality concerns recedes

ACCUMULATE

CMP: Rs461                                        Target Price: Rs510

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n     BOI’s results for Q3FY11 were in line with street estimates with NII at Rs20bn (32.9%yoy) and earnings at Rs6.5bn (61.1%yoy)

n     Key positives in the results – 1) 20bps expansion in NIMs 2) lower slippage rate at 0.8% annualised and 3) stable CASA despite deposit rates going up

n     Added by strong recoveries and lower slippages, the NPAs for the first time showed dramatic reduction at gross as well as net level

n     Valuations attractive at 1.8x FY11E/1.4x FY12E ABV. Asset quality and provisions show improving trend. Expect RoAs to reach back 1%. Upgrade to ACCUMULATE with TP of Rs510

NII growth ahead of expectation

The NII grew by 32.9%yoy to Rs19.9bn slightly above our expectation led by 22.8%yoy

growth in advance and 20bps improvement in NIM’s to 2.7%. However the management

indicated that there will be some pressure on NIM’s over the next two quarters due to

the lagged impact of the deposit repricing.

Stable cost of funds aids in margin expansion

The NIMs for the quarter expanded by an impressive 20bps qoq to 2.7% as the yield on

advances increased by 31bps even as the cost of funds remained stable. The stable

cost of deposits could have been driven by (1) higher growth in foreign deposits (2)

much lower growth in domestic term deposits and (3) lagged repricing. We believe that

though the cost of deposits has shown decline for the quarter, lagged repricing will push

up the costs in coming quarters.

Advances growth remains strong

The gross advances for the quarter have grown by 22.8% yoy (4.6% qoq). The advances

growth for the quarter was driven by sectors like rubber and plastic (+3.9% qoq), Vehicles &

Transport equipment (4.4% qoq), and Textiles (3.0%)

The growth has moderated in SME corporate and retail segment during the quarter.

However the management has indicated that going forward the focus will be on SMEs and

retail segments.

CASA mix shows improvement

The bank reported marginal improvement of 23bps in CASA mix to 33.6% during the

quarter. The improvement in CASA mix in a rising rate scenario is really commendable.

Moreover marginal growth in the term deposits also helped in improvement of the deposit

profile.

Higher recoveries boost other income growth

The other income grew by 10.9%qoq to Rs6.5bn primarily driven by strong recoveries and

higher treasury gains. Recoveries were surprisingly higher at 658mn during the quarter as

against normal runrate of ~Rs300mn. Moreover higher treasury gains of Rs592mn also

helped in keeping the overall growth in double digits. However fee income declined by 5.6%

to Rs2.8bn.

Strong core operating profit growth at 15.9% qoq

The banks opex increased substantially by 27.1%qoq, as the bank provided Rs2.3bn for

pension liabilities. As a result the operating profit was flat qoq. However adjusted for

employee related provisions and treasury gains, the core operating profit growth is

significantly higher at 15.9%qoq.

Though the bank has not yet crystallized the pension liabilities, however indicated that it

could be in the range of Rs45-50bn.

Provisions rise as bank provided for Lehman

During the quarter BOI has made one-time provisions of Rs2bn for an old exposure relating

to Lehman Brothers. This is over and above Rs1.6bn provided for the same exposure in

H2FY09.

The improving asset quality has resulted in improvement in credit costs as they came down

to ~0.38% for M9FY11 compared to 0.70% in M9FY10.

Asset quality shows improvement; Slippage rate falls as expected

The bank has shown substantial improvement in the asset quality as Gross NPA came

down by Rs3.2bn qoq, while Net NPA declines by Rs4.1bn qoq. The slippage for the

quarter came down substantially to Rs4.8bn as against average slippage of Rs7.2bn in the

last two quarters, resulting in slippage rate of just 0.2% for the quarter. The management

indicated that the slippages going forward will be contained at the current levels. This bodes

well for the bank as asset quality had been the biggest concern for this bank for quite some

time.

Valuations and view

The stock is currently quoting at 1.8 x FY11E/1.4x FY12E ABV. We believe that valuations

are attractive at 1.8x FY11E/1.4x FY12E ABV. Asset quality and provisions are now

showing declining trend and as a result we expect RoAs to reach back 1%.We have

upgraded our earnings for FY12E upwards by 12% to take into account lower provisioning

cost and higher asset growth. We upgrade to ACCUMULATE with TP of Rs510