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Bank of India
Overweight
BOI.BO, BOI IN
Strong improvement in asset quality
• Strong 3Q FY11: Bank of India reported net profit of Rs6.5B, up 61%
y/y. Profits were marginally lower than our estimates as provisions were
affected by a one-off derivative loss of Rs2.0B. Asset quality
improvement was strong, although the recent outperformance has
reduced the valuation gap with peers.
• Good improvement in asset quality: Gross NPAs fell in 3Q given the
large upgrade, but overall asset quality improved also because of
significantly lower gross slippages at <1.0% vs 1.6% in 1H FY11. As a
result, credit costs decreased to ~70bp from ~1.0% in 1H FY11 and
provision coverage improved by ~500bp. Management expects the
positive asset quality momentum to continue.
• Margin surprises: BOI’s NII increased 12% q/q, with margins
improving to 3.09%, up ~28bp q/q, given the low base impact as
margins in 2Q FY11 were affected by a one-off. The ~30bp margin
improvement was much better than expected, but we expect margin
pressure over the next 2-3 quarters given the increase in funding costs.
• Some concerns: (1) The pension liability (Rs40-45B), though not yet
finalized, is higher than expected. (2)>20% growth with current tier-1 at
~8.5% could lead to dilution over the medium term. (3) Management’s
increasing focus on SME/Agri/Retail to improve yields could lead to
asset quality risks over the medium term.
• Maintain Overweight: Our upgrade on BOI was based on a revival in
asset quality and relatively attractive valuations. Asset quality
improvement was indeed strong in 3Q, which should help profitability.
With the recent outperformance, the valuation gap with PNB/BOB has
narrowed to ~10%. However, our Sep-11 price target of Rs590 for BOI
still implies considerable absolute upside. We maintain our Overweight
rating on BOI.
Asset quality has improved
Net NPAs decreased by ~20% in 3Q given lower Gross NPAs (down 7% y/y) due to
the large upgrade and increase in coverage by 500bp q/q. Provisions remained high
due to a derivative contract loss of Rs2.0B, on which the court ruling was against
Bank of India. Specific NPA provisions fell significantly. Overall asset quality
improvement was driven not just by the large upgrade but also by lower gross
slippages.
Margin surprises
BOI’s NII increased 12% q/q, with margins improving to 3.09%, up ~28bp q/q,
given the low base impact as margins in 2Q FY11 were affected by a one-off. CASA
moderated marginally due to tepid growth for current deposits growth at just <10%
y/y. We expect margins to moderate from the current level with the increase in cost
of funds.
Other 3Q highlights
Balance sheet growth: Loan and deposit growth was ~23% y/y and 5% q/q, with
strong growth in the large corporate segment at 47% y/y and tepid retail and SME
growth. Management intends to focus more on retail and the mid market over the
medium term, which could be an area of concern.
Pension liability –Higher than expected: Although management has still not
disclosed the final pension liability, it has indicated a range of Rs40-45B, which is
higher than expected, and would lead to higher opex growth.
Opex growth high due to higher pension provisions: Operating costs were higher
than expected with ~33% y/y growth. BOI made additional provision of Rs2.0B in
3Q towards due to a higher expected liability (Rs40-45B).
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Bank of India
Overweight
BOI.BO, BOI IN
Strong improvement in asset quality
• Strong 3Q FY11: Bank of India reported net profit of Rs6.5B, up 61%
y/y. Profits were marginally lower than our estimates as provisions were
affected by a one-off derivative loss of Rs2.0B. Asset quality
improvement was strong, although the recent outperformance has
reduced the valuation gap with peers.
• Good improvement in asset quality: Gross NPAs fell in 3Q given the
large upgrade, but overall asset quality improved also because of
significantly lower gross slippages at <1.0% vs 1.6% in 1H FY11. As a
result, credit costs decreased to ~70bp from ~1.0% in 1H FY11 and
provision coverage improved by ~500bp. Management expects the
positive asset quality momentum to continue.
• Margin surprises: BOI’s NII increased 12% q/q, with margins
improving to 3.09%, up ~28bp q/q, given the low base impact as
margins in 2Q FY11 were affected by a one-off. The ~30bp margin
improvement was much better than expected, but we expect margin
pressure over the next 2-3 quarters given the increase in funding costs.
• Some concerns: (1) The pension liability (Rs40-45B), though not yet
finalized, is higher than expected. (2)>20% growth with current tier-1 at
~8.5% could lead to dilution over the medium term. (3) Management’s
increasing focus on SME/Agri/Retail to improve yields could lead to
asset quality risks over the medium term.
• Maintain Overweight: Our upgrade on BOI was based on a revival in
asset quality and relatively attractive valuations. Asset quality
improvement was indeed strong in 3Q, which should help profitability.
With the recent outperformance, the valuation gap with PNB/BOB has
narrowed to ~10%. However, our Sep-11 price target of Rs590 for BOI
still implies considerable absolute upside. We maintain our Overweight
rating on BOI.
Asset quality has improved
Net NPAs decreased by ~20% in 3Q given lower Gross NPAs (down 7% y/y) due to
the large upgrade and increase in coverage by 500bp q/q. Provisions remained high
due to a derivative contract loss of Rs2.0B, on which the court ruling was against
Bank of India. Specific NPA provisions fell significantly. Overall asset quality
improvement was driven not just by the large upgrade but also by lower gross
slippages.
Margin surprises
BOI’s NII increased 12% q/q, with margins improving to 3.09%, up ~28bp q/q,
given the low base impact as margins in 2Q FY11 were affected by a one-off. CASA
moderated marginally due to tepid growth for current deposits growth at just <10%
y/y. We expect margins to moderate from the current level with the increase in cost
of funds.
Other 3Q highlights
Balance sheet growth: Loan and deposit growth was ~23% y/y and 5% q/q, with
strong growth in the large corporate segment at 47% y/y and tepid retail and SME
growth. Management intends to focus more on retail and the mid market over the
medium term, which could be an area of concern.
Pension liability –Higher than expected: Although management has still not
disclosed the final pension liability, it has indicated a range of Rs40-45B, which is
higher than expected, and would lead to higher opex growth.
Opex growth high due to higher pension provisions: Operating costs were higher
than expected with ~33% y/y growth. BOI made additional provision of Rs2.0B in
3Q towards due to a higher expected liability (Rs40-45B).
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