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Bank of India
OW: 4QFY11- Pension and asset quality spoil the show
Inline margins, but higher one-off pension provision and
higher credit cost dented profit growth
Expect 10-12bp margin pressure in FY12, while pockets of
concern in asset quality remain
Retain OW rating, but cutting TP to INR521 from INR546,
implying a total potential return of 27%
4QFY11 earnings came in at INR4.94bn, a 15% YoY growth. Profits were much below ours
and the Street’s estimates, mainly due to higher one-off pension provision and higher credit
cost due to higher slippages. However, core margins were inline with our expectations. The
stock corrected steeply by 8% due to higher pension and credit costs.
Operational review: BoI’s delivered higher than expected loan growth of 26% YoY, mainly
driven by agriculture and corporate segments. Excluding one-off interest on a income tax
refund, NIM dipped 15bp QoQ to 2.94%, which was inline with our expectations. While core
margins were stable, the net profit was dented by substantial pension provisions of INR9.8 bn,
including a one-off provision for retired employees at INR7.1 bn. Serving employees pension
liability was estimated at INR22.1 bn, to be amortised over five years starting FY11. The chief
negative surprise was a rise in gross NPLs with higher slippages at 2.1%, leading to higher
credit costs.
Earnings outlook: We expect loan growth to be slightly better than industry in FY12.
However, growth is not likely to reflected in margins as funding cost pressures are likely to
shave off 10-12bp over FY11 margins. Employee costs are likely to normalise with one-off
impacts already taken in FY11. Asset quality continues to remain a concern. We continue to
remain cautious and expect a slippage level of 1.5% in FY12. However, our estimates largely
remain the same, with a minor decline in PAT estimates for FY11 and FY12.
Valuations: Two things that have driven BoI’s stock performance are margins and asset
quality. While NIM has normalised and is likely to behave in line with industry trends, the
asset quality trend is still tentative. The stock is currently trading at 6.3x and 1.2x rolling PE
and PB, respectively, with the stock trading at a 20% PE and 9% PB discount to the PSU
universe. We continue to value BoI at 6.7x and 1.4x 12-month rolling PE and PB, respectively.
However, based on our new weights of PE, PB, and DCF at 50%, 20%, and 30%, respectively,
to realign the valuations with the near macro uncertainties and increasing risks to earnings
growth for the sector, we are cutting our target price to INR521, implying a potential return
(including dividends) of 27%. Maintain Overweight.
Downside risks: Worse asset quality, higher credit costs
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bank of India
OW: 4QFY11- Pension and asset quality spoil the show
Inline margins, but higher one-off pension provision and
higher credit cost dented profit growth
Expect 10-12bp margin pressure in FY12, while pockets of
concern in asset quality remain
Retain OW rating, but cutting TP to INR521 from INR546,
implying a total potential return of 27%
4QFY11 earnings came in at INR4.94bn, a 15% YoY growth. Profits were much below ours
and the Street’s estimates, mainly due to higher one-off pension provision and higher credit
cost due to higher slippages. However, core margins were inline with our expectations. The
stock corrected steeply by 8% due to higher pension and credit costs.
Operational review: BoI’s delivered higher than expected loan growth of 26% YoY, mainly
driven by agriculture and corporate segments. Excluding one-off interest on a income tax
refund, NIM dipped 15bp QoQ to 2.94%, which was inline with our expectations. While core
margins were stable, the net profit was dented by substantial pension provisions of INR9.8 bn,
including a one-off provision for retired employees at INR7.1 bn. Serving employees pension
liability was estimated at INR22.1 bn, to be amortised over five years starting FY11. The chief
negative surprise was a rise in gross NPLs with higher slippages at 2.1%, leading to higher
credit costs.
Earnings outlook: We expect loan growth to be slightly better than industry in FY12.
However, growth is not likely to reflected in margins as funding cost pressures are likely to
shave off 10-12bp over FY11 margins. Employee costs are likely to normalise with one-off
impacts already taken in FY11. Asset quality continues to remain a concern. We continue to
remain cautious and expect a slippage level of 1.5% in FY12. However, our estimates largely
remain the same, with a minor decline in PAT estimates for FY11 and FY12.
Valuations: Two things that have driven BoI’s stock performance are margins and asset
quality. While NIM has normalised and is likely to behave in line with industry trends, the
asset quality trend is still tentative. The stock is currently trading at 6.3x and 1.2x rolling PE
and PB, respectively, with the stock trading at a 20% PE and 9% PB discount to the PSU
universe. We continue to value BoI at 6.7x and 1.4x 12-month rolling PE and PB, respectively.
However, based on our new weights of PE, PB, and DCF at 50%, 20%, and 30%, respectively,
to realign the valuations with the near macro uncertainties and increasing risks to earnings
growth for the sector, we are cutting our target price to INR521, implying a potential return
(including dividends) of 27%. Maintain Overweight.
Downside risks: Worse asset quality, higher credit costs
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