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Recovering from asset quality setback…
Bank of India (BoI) seems to be in the last phase of its asset quality cycle
with total slippages declining 30% YoY, total reductions improving 79%
YoY and total provision for NPA declining 40% YoY in FY11 (refer Exhibit
9). Even though Q4FY11 slippages are high at | 999 crore, we believe a
turnaround could be in the offing from H2FY12E, with higher recoveries
and upgradations reducing GNPA from 2.2% to 2% by FY13E. We see
20% CAGR in business boosting PAT at 28% CAGR over FY11-13E.
�� Q4FY11 show dampener: High NII growth offset by pension liability
Total income grew 38% YoY on the back of NII growth of 49% YoY
(highest since Q4FY09) and other income increasing 27% on
account of higher trading and fee-based income. However, profits
took a hit as opex increased 144% YoY due to second pension
option provisions. The bank has a total pension liability of | 2920
crore of which it fully provided | 708 crore for retired employees
and | 442.4 crore (1/5 of total liability of | 2212 crore) for existing
employees in FY11. It also charged | 85.8 crore (1/5 of | 429 crore)
for gratuity and | 125.3 crore as transitional liability, thus inflating
opex. Going forward, it needs to provide ~| 653 crore in FY12E and
| 528 crore in FY13-15E. We expect higher income and lower credit
cost to drive PAT growth in FY13E.
�� Worst could be over for asset quality…
Even though slippages of | 999 crore bloated GNPA by 6% QoQ to |
4812 crore and NNPA increased 17% QoQ to | 1945 crore in
Q4FY11, a full year comparison indicates that the worst may be
over. With slippages declining 30% YoY, total reductions improving
79% YoY and total provision for NPA declining 40% YoY to | 1054
crore, we expect asset quality to be maintained at current levels and
estimate GNPA@ 2% and NNPA of 0.7% for FY13E.
Valuation
At the CMP of | 402, BoI is trading at 1.3x FY13E ABV. We estimate PAT
will cross its pre-crisis levels of | 3000 crore by FY12E despite pressure
on NIM due to the savings rate hike. With RoA and RoE expected to climb
back to FY09 levels of to 0.9% and 21% and expected asset quality
turnaround by FY13E, we value the bank at 1.4x its FY13E ABV and arrive
at a target price of | 446. The downside risk to our call is windfall
slippages in the coming period that could be an overhang on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Recovering from asset quality setback…
Bank of India (BoI) seems to be in the last phase of its asset quality cycle
with total slippages declining 30% YoY, total reductions improving 79%
YoY and total provision for NPA declining 40% YoY in FY11 (refer Exhibit
9). Even though Q4FY11 slippages are high at | 999 crore, we believe a
turnaround could be in the offing from H2FY12E, with higher recoveries
and upgradations reducing GNPA from 2.2% to 2% by FY13E. We see
20% CAGR in business boosting PAT at 28% CAGR over FY11-13E.
�� Q4FY11 show dampener: High NII growth offset by pension liability
Total income grew 38% YoY on the back of NII growth of 49% YoY
(highest since Q4FY09) and other income increasing 27% on
account of higher trading and fee-based income. However, profits
took a hit as opex increased 144% YoY due to second pension
option provisions. The bank has a total pension liability of | 2920
crore of which it fully provided | 708 crore for retired employees
and | 442.4 crore (1/5 of total liability of | 2212 crore) for existing
employees in FY11. It also charged | 85.8 crore (1/5 of | 429 crore)
for gratuity and | 125.3 crore as transitional liability, thus inflating
opex. Going forward, it needs to provide ~| 653 crore in FY12E and
| 528 crore in FY13-15E. We expect higher income and lower credit
cost to drive PAT growth in FY13E.
�� Worst could be over for asset quality…
Even though slippages of | 999 crore bloated GNPA by 6% QoQ to |
4812 crore and NNPA increased 17% QoQ to | 1945 crore in
Q4FY11, a full year comparison indicates that the worst may be
over. With slippages declining 30% YoY, total reductions improving
79% YoY and total provision for NPA declining 40% YoY to | 1054
crore, we expect asset quality to be maintained at current levels and
estimate GNPA@ 2% and NNPA of 0.7% for FY13E.
Valuation
At the CMP of | 402, BoI is trading at 1.3x FY13E ABV. We estimate PAT
will cross its pre-crisis levels of | 3000 crore by FY12E despite pressure
on NIM due to the savings rate hike. With RoA and RoE expected to climb
back to FY09 levels of to 0.9% and 21% and expected asset quality
turnaround by FY13E, we value the bank at 1.4x its FY13E ABV and arrive
at a target price of | 446. The downside risk to our call is windfall
slippages in the coming period that could be an overhang on the stock.
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