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Bank of India
Key highlights of 3QFY11 and what can be expected for the rest of FY11
Loan book grew by 6.2% q-q and 22.8% y-y in 3QFY11, with contributions coming
from corporate loans (30% y-y) and SME loans (31% y-y) and rural loans (16.4%).
Retail loans declined 18.6% y-y (1.9% q-q). This loan growth was backed by a
deposit growth of 22.6% y-y – CASA deposits grew 26.2% y-y and term deposits
21.2% y-y. Blended CASA ratio increased to 28.3% from 29.1% in 2QFY11.
NIM expanded by 30bp to 3.1% in 3QFY11 from 2.8% in 2QFY11, on the back of a
flat cost of funds of 4.75%, an expansion in blended loan yield of 30bp to 8.8% and
a 100bp q-q increase in LDR. Net interest income grew by an impressive 11.9% qq
and 32.9% y-y on the back of this NIM expansion. Non-interest income increased
10.9% q-q and 13.4% y-y.
GNPLs declined 6.7% sequentially, increasing 8.5% y-y – GNPL ratio closed at
2.4%. NNPL ratio closed at 0.88% on the back of a core provision cover of 63.4%
(74.5% including technical write-offs). Loan-loss provisions dropped sharply q-q by
38bps to come at 28bp for the quarter.
What the bank needs to achieve in 4QFY11 to meet our expectations
Loans of INR115b will have to be disbursed in 4QFY11 to meet our loan growth
expectation of 20.6% for FY11. We are keeping NIMs flat at 2.9% level in 4QFY11.We
need to bear in mind the higher incidence of priority sector loans in 4Q (which should
drag loan yields down) and a further pass-through of higher funding costs. We are
factoring in LLPs of 46bp for 4QFY11.
What to expect in FY12
We are budgeting for a loan growth of 23.7%, NIM of 2.7%, core fee income growth of
25% – leading to a PAT growth of 9%. Our loan-loss provisions increase to 70bp for
FY12. We are factoring in a cost-income ratio of 45% for FY12.
Valuation: We have cut our TP on BOI to INR460 (from INR500), implying a FY12E
P/BV of 1.45x (earlier at 1.5x). The stock trades at 1.26x our FY12E adjusted BV for
adjusted ROE of 19%. Our TP is based on a three-stage residual income model, which
assumes a risk-free rate of 8.3%, equity risk premium of 6%, terminal growth rate of 4%
and beta of 1.5. Key risks to TP are: higher-than-expected NIM compression and LLPs.
Limited downside
Upgrade to HOLD; we see limited downside from here
Signs of improving liquidity is another positive
Revise TP to INR460, which implies 1.45x FY12E adjusted BV
Trades at 1.26x our FY12E adjusted BV for ROE of 19%
Why we have upgraded now
We upgrade Bank of India (BOI) to HOLD
(from Reduce), as we see limited
downside after the recent correction. We
downgraded the stock on concerns about
tightening liquidity in the system (see our
note, “Time to book profit”, dated 8
October 2010). We anticipate the liquidity
conditions will return to more comfortable
levels over the next two-to-three months
as deposit growth is increasing and
government spending will recycle
government surplus into the system. We
believe BOI’s current valuations largely,
price in the expected margin contraction
and a possible sector-specific spike in credit costs.
Changes to the sector and FY12 outlook
We downgraded BOI in October on concerns about a widening gap
between credit growth and deposit growth and, consequently, tight
liquidity in the system driving up funding costs. We have seen this thesis
play out so far, with the loan-to-deposit ratio (LDR) looking very stretched
for all major banks (see Exhibit 3 for BOI’s historical and incremental
LDR). Deposit rates have increased by 200-300bp across the sector and
deposit growth has inched up from 14% levels in October 2010 to 16.5%
in early January 2011. This deposit traction, together with the expected
increase in government spending over the next two to three months
should further ease the liquidity pressure in the system. In this context,
we are building in NIM contraction for FY12 and also increasing our loanloss
provision (LLP) assumption to account for the possible increase in
credit cost. We calculate that BOI will have to disburse loans worth
INR115b in 4QFY11 to meet our loan growth estimate of 21% for FY11.
This represents q-q loan growth of 5.4% in 4QFY11. We assume an NIM
decline of 20bp over the next two to three quarters, in view of the
generally higher incidence of priority sector loans in 4Q (which should
drag down loan yields) and a further pass-through of higher funding
costs. We factor in LLP of 51bp in FY11 (113bp in FY10). For FY12, we
project loan growth of 24%, NIM of 2.7% and core-fee income growth of
24.5%. Our LLP estimate is 70bp for FY12.
Target price change and valuation
We reduce our target price for BOI to INR460.00 (from INR500.00),
implying a FY12E P/BV of 1.45x (earlier 1.5x). The stock trades at 1.26x
our FY12E adjusted BV for adjusted ROE of 19%. Our target price is
based on a three-stage residual income model, which assumes a risk
free rate of 8.3%, equity risk premium of 6%, terminal growth rate of 4%
and beta of 1.5. Key risks to our target price are: higher-than-expected
NIM compression and LLP.
The Risk Experts
• Our starting point for this page is recognition of the macro
factors that can have a significant impact on stock-price
performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bank of India
Key highlights of 3QFY11 and what can be expected for the rest of FY11
Loan book grew by 6.2% q-q and 22.8% y-y in 3QFY11, with contributions coming
from corporate loans (30% y-y) and SME loans (31% y-y) and rural loans (16.4%).
Retail loans declined 18.6% y-y (1.9% q-q). This loan growth was backed by a
deposit growth of 22.6% y-y – CASA deposits grew 26.2% y-y and term deposits
21.2% y-y. Blended CASA ratio increased to 28.3% from 29.1% in 2QFY11.
NIM expanded by 30bp to 3.1% in 3QFY11 from 2.8% in 2QFY11, on the back of a
flat cost of funds of 4.75%, an expansion in blended loan yield of 30bp to 8.8% and
a 100bp q-q increase in LDR. Net interest income grew by an impressive 11.9% qq
and 32.9% y-y on the back of this NIM expansion. Non-interest income increased
10.9% q-q and 13.4% y-y.
GNPLs declined 6.7% sequentially, increasing 8.5% y-y – GNPL ratio closed at
2.4%. NNPL ratio closed at 0.88% on the back of a core provision cover of 63.4%
(74.5% including technical write-offs). Loan-loss provisions dropped sharply q-q by
38bps to come at 28bp for the quarter.
What the bank needs to achieve in 4QFY11 to meet our expectations
Loans of INR115b will have to be disbursed in 4QFY11 to meet our loan growth
expectation of 20.6% for FY11. We are keeping NIMs flat at 2.9% level in 4QFY11.We
need to bear in mind the higher incidence of priority sector loans in 4Q (which should
drag loan yields down) and a further pass-through of higher funding costs. We are
factoring in LLPs of 46bp for 4QFY11.
What to expect in FY12
We are budgeting for a loan growth of 23.7%, NIM of 2.7%, core fee income growth of
25% – leading to a PAT growth of 9%. Our loan-loss provisions increase to 70bp for
FY12. We are factoring in a cost-income ratio of 45% for FY12.
Valuation: We have cut our TP on BOI to INR460 (from INR500), implying a FY12E
P/BV of 1.45x (earlier at 1.5x). The stock trades at 1.26x our FY12E adjusted BV for
adjusted ROE of 19%. Our TP is based on a three-stage residual income model, which
assumes a risk-free rate of 8.3%, equity risk premium of 6%, terminal growth rate of 4%
and beta of 1.5. Key risks to TP are: higher-than-expected NIM compression and LLPs.
Limited downside
Upgrade to HOLD; we see limited downside from here
Signs of improving liquidity is another positive
Revise TP to INR460, which implies 1.45x FY12E adjusted BV
Trades at 1.26x our FY12E adjusted BV for ROE of 19%
Why we have upgraded now
We upgrade Bank of India (BOI) to HOLD
(from Reduce), as we see limited
downside after the recent correction. We
downgraded the stock on concerns about
tightening liquidity in the system (see our
note, “Time to book profit”, dated 8
October 2010). We anticipate the liquidity
conditions will return to more comfortable
levels over the next two-to-three months
as deposit growth is increasing and
government spending will recycle
government surplus into the system. We
believe BOI’s current valuations largely,
price in the expected margin contraction
and a possible sector-specific spike in credit costs.
Changes to the sector and FY12 outlook
We downgraded BOI in October on concerns about a widening gap
between credit growth and deposit growth and, consequently, tight
liquidity in the system driving up funding costs. We have seen this thesis
play out so far, with the loan-to-deposit ratio (LDR) looking very stretched
for all major banks (see Exhibit 3 for BOI’s historical and incremental
LDR). Deposit rates have increased by 200-300bp across the sector and
deposit growth has inched up from 14% levels in October 2010 to 16.5%
in early January 2011. This deposit traction, together with the expected
increase in government spending over the next two to three months
should further ease the liquidity pressure in the system. In this context,
we are building in NIM contraction for FY12 and also increasing our loanloss
provision (LLP) assumption to account for the possible increase in
credit cost. We calculate that BOI will have to disburse loans worth
INR115b in 4QFY11 to meet our loan growth estimate of 21% for FY11.
This represents q-q loan growth of 5.4% in 4QFY11. We assume an NIM
decline of 20bp over the next two to three quarters, in view of the
generally higher incidence of priority sector loans in 4Q (which should
drag down loan yields) and a further pass-through of higher funding
costs. We factor in LLP of 51bp in FY11 (113bp in FY10). For FY12, we
project loan growth of 24%, NIM of 2.7% and core-fee income growth of
24.5%. Our LLP estimate is 70bp for FY12.
Target price change and valuation
We reduce our target price for BOI to INR460.00 (from INR500.00),
implying a FY12E P/BV of 1.45x (earlier 1.5x). The stock trades at 1.26x
our FY12E adjusted BV for adjusted ROE of 19%. Our target price is
based on a three-stage residual income model, which assumes a risk
free rate of 8.3%, equity risk premium of 6%, terminal growth rate of 4%
and beta of 1.5. Key risks to our target price are: higher-than-expected
NIM compression and LLP.
The Risk Experts
• Our starting point for this page is recognition of the macro
factors that can have a significant impact on stock-price
performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process.
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