Buy Bank of India: :Improvement in NPAs to reduce credit costs: Fortune

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Improvement in NPAs to reduce credit costs: With gross NPA
scaling down to 2.2% in FY11 from 2.9% in FY10, clear improvement is
being witnessed in asset quality. Slippage improved sharply to 1.5% in
FY11 as against 2.7% in FY10, which we believe will further decline to
1.3% in FY12-13. Also, higher NPA recoveries, which emerged during
FY10, coupled with healthy provision coverage ratio, would decrease
current credit cost of 0.6% to 0.5% over FY12-13.
Healthy credit growth: Credit growth regained momentum to grow by
26% in FY11 after a below industry credit growth in FY10. With NPA
recovery process back on the track, the bank is expected to continue its
strategy of growing credit above the industry average. With its current
CDR at 71.3% there is scope for further expansion. A healthy capital
adequacy of 12.2% will also enable it to grow its balance sheet without
capital constraints. The board of directors has approved issue of up to
180 mn shares will help in further strengthening its capital adequacy.
Improvement in NIMs: NIMs rebounded to 2.8% in FY11 from 2.5%
in FY10 as yield on advances increased and as interest on NPA recovery
portfolio started getting booked into the interest income. We expect
NIMs to expand further by 10 bps to 2.9% in FY12-13E as the bank
shift back its focus on mid-corporate and SME segments while slowing
down on large corporate lending.
Stronger fee income: Fee income had slowed down significantly in
line with credit growth as a large part of it is linked to credit. With
improvement in credit, fee income is also set to rise. Fees from project
finance, in particular, are expected to drive this growth.
Operational efficiency: Cost to income ratio had deteriorated in FY11,
on account of higher one-time pension provisioning for retired
employees. With growth in income also back on the track, cost to
income will only improve going forward.
Valuation: At the CMP the stock is trading at 6.7x and 5.2x FY12E and
FY13E earnings, and at 1.1x and 1.0x P/ABV FY12E and FY13E
respectively, which we feel is cheap considering its pan-India presence,
strong branch network and improved ROE. We expect an ROA of 1.3%
and ROE of 18.7% in FY13E. We initiate coverage on the stock with a
BUY rating and price target of Rs510 based on P/ABV of 1.2x FY13E.