Bank of India - Asset quality disappointment ::Macquarie Research,

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Bank of India

Asset quality disappointment

Event
 Bank of India (BOI) reported 4Q11 PAT of Rs4.9bn vs our estimate of Rs6.1bn.
The lower-than-expected PAT was largely driven by Rs7bn of one-off retired
employees’ pension-related provisioning. NPLs disappointed in the quarter.
However, we believe there is value in the stock and maintain our OP rating.

Impact
 Poor performance on delinquencies partly explained by automated
recognition. Delinquencies this quarter were Rs10bn vs Rs5–8bn seen in the
last three quarters and moderately ahead of our estimate. A significant
proportion of this jump, ~Rs3.8bn, was related to the bank automating NPL
recognition for smaller accounts. So far ~82% of all accounts have been
brought under automatic recognition, and the bank plans to automate the rest
of the accounts by September, which could result in more NPLs in 1H12.
 While the quarterly delinquency figure for the bank has been volatile, on a fullyear
basis management was confident of containing NPLs below 1.3% of
loans for FY12E vs 1.7% in FY11. We have built in delinquency of 1.45%,
giving us what we think is a reasonable cushion.
 Significantly lower employee opex could provide profitability kicker next
year. The bank front-ended pension expenses related to retired employees of
Rs7bn this quarter. In all BOI booked AS 15 and a second option of pension
provisions amounting to Rs16bn in FY11E, which could be down to Rs9bn in
FY12E and even lower in FY13E.
 1Q12E could see NIM support. NIMs were down 15bp QoQ to 2.94%. This
is largely the result of (i) cost of deposits going up, while the bank did not
revise loan yields up, (ii) slippage of certain high-yielding accounts to NPLs
and (iii) a 22bp QoQ decline in international NIMs. Deposit cost increased
33bp QoQ, while asset yields were flat. The bank is planning to revise its loan
rates up soon, which could result in incremental improvement in NIMs. NIMs
could also be supported by an increase in LDR, from the current 71%.
Management aims to focus more on SME and retail lending, which should
yield higher. Management also believes current international NIMs of 1.2%
should be sustainable.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs530.00 based on a Gordon growth methodology.
 Catalyst: NPL reduction in 2H11E.
Action and recommendation
 We maintain our OP rating on the stock. Aided by lower employee expenses
and lower delinquencies, the bank could show earnings growth of 50%+ in
FY12E. Current valuations look attractive from a longer-term perspective.