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Bank of India (BoI) has consistently underperformed the Sensex, due to deterioration
in its asset quality and a sluggish growth in its core income. Based on the input
gained from our interaction with the bank’s management we expect a sharp increase
in the slippages over the next two quarters mainly due to the implementation of
system-based classification of non-performing assets (NPAs). Further, the asset
quality overhang continues on account of the bank’s exposure to the state electricity
boards (SEBs; about Rs11,000 crore), small and medium enterprises (SMEs; 22% of
the domestic loan book) and higher restructured loans (5.2% of loans). We had
already downgraded our earnings estimates for the bank by 10-12% after the
announcement of its Q1FY2012 results. Now following the interaction with the
bank’s management we are further downgrading our estimates by 4% and 7% for
FY2012 and FY2013 respectively to factor in the increase in the NPA provisions and
the slower business growth. We also downgrade our rating on the bank to Hold
from Buy with a revised price target of Rs350 (valuing it at a 10% discount to the
FY2013E book value due to the rising concerns about its asset quality).
Mounting concerns over the asset quality
BoI is likely to report a sharp increase in its NPAs over the next two quarters as all
accounts (including the agri loans) will shift to a system-based classification.
According to the management, the bank’s NPAs have increased in the first two
months of Q2FY2012 especially from smaller accounts due to the migration to a
system-based classification. The SME portfolio as of now is not showing any major
sign of stress but some borrower-specific accounts have shown weakness. The
bank has relatively higher exposure to sensitive segments such as SEBs (5.1% of
total loans) and aviation which can contribute to higher NPAs. We have raised our
credit cost estimates for FY2012 and FY2013 which has resulted in a 10% rise in
the provision expenses over our previous estimates.
Recoveries yet to pick up
Though the bank has dedicated a team headed by a general manager for recoveries,
the recoveries have yet to pick up in a major way. The recoveries from the smaller
accounts have improved but the deterioration in the macro environment is likely
to cast a shadow on the overall recovery targets indicated by the management.
Credit growth in line with industry
The advances growth for BoI is likely to be around 17% in FY2012 as the credit
demand has dropped sharply due to the monetary tightening by the Reserve Bank
of India (RBI). Though the management expects some pick-up in advances in
H2FY2012, but it would be a challenge to grow 17% in the current fiscal. The
overseas advances are expected to grow at a higher rate (around 22% year on
year) than the domestic advances. We have trimmed our loan growth estimates by
100 basis points to 17%. However, the current account and savings account (CASA)
ratio, which had deteriorated in FY2011 due to a rise in the term deposits is likely
to improve by 100-150 basis points in FY2012.
The margin is likely to remain at sub-2.5% levels
We expect the net interest margin to be at sub-2.4-2.5%
levels in FY2012 due to an increase in the cost of funds
and a reversal of the interest on the NPAs. During
Q1FY2012 the net interest margin of the bank had declined
to 2.19%, which was the lowest among its peer banks.
Going forward, the slower credit growth and the rising
cost of deposits will add pressure on the bank’s margins.
Valuations and outlook
BoI continues to struggle with asset quality pressures that
have taken a toll on its earnings growth. Since the bank’s
loan book is relatively more exposed to the sensitive
segments (SEBs, SMEs, aviation, restructured loans etc),
it could throw negative surprises on the NPA front. We,
therefore, raise our credit cost estimates to 95 basis points
for FY2012 and to 100 basis points for FY2013. We are
further downgrading our estimates by 4% and 7% for
FY2012 and FY2013 respectively to factor the increase in
the NPA provisions and the slower business growth. We
also downgrade our rating on the bank to Hold from Buy
with a revised price target of Rs350 (valuing it at a 10%
discount to FY2013E book value due to the rising concerns
about its asset quality).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bank of India (BoI) has consistently underperformed the Sensex, due to deterioration
in its asset quality and a sluggish growth in its core income. Based on the input
gained from our interaction with the bank’s management we expect a sharp increase
in the slippages over the next two quarters mainly due to the implementation of
system-based classification of non-performing assets (NPAs). Further, the asset
quality overhang continues on account of the bank’s exposure to the state electricity
boards (SEBs; about Rs11,000 crore), small and medium enterprises (SMEs; 22% of
the domestic loan book) and higher restructured loans (5.2% of loans). We had
already downgraded our earnings estimates for the bank by 10-12% after the
announcement of its Q1FY2012 results. Now following the interaction with the
bank’s management we are further downgrading our estimates by 4% and 7% for
FY2012 and FY2013 respectively to factor in the increase in the NPA provisions and
the slower business growth. We also downgrade our rating on the bank to Hold
from Buy with a revised price target of Rs350 (valuing it at a 10% discount to the
FY2013E book value due to the rising concerns about its asset quality).
Mounting concerns over the asset quality
BoI is likely to report a sharp increase in its NPAs over the next two quarters as all
accounts (including the agri loans) will shift to a system-based classification.
According to the management, the bank’s NPAs have increased in the first two
months of Q2FY2012 especially from smaller accounts due to the migration to a
system-based classification. The SME portfolio as of now is not showing any major
sign of stress but some borrower-specific accounts have shown weakness. The
bank has relatively higher exposure to sensitive segments such as SEBs (5.1% of
total loans) and aviation which can contribute to higher NPAs. We have raised our
credit cost estimates for FY2012 and FY2013 which has resulted in a 10% rise in
the provision expenses over our previous estimates.
Recoveries yet to pick up
Though the bank has dedicated a team headed by a general manager for recoveries,
the recoveries have yet to pick up in a major way. The recoveries from the smaller
accounts have improved but the deterioration in the macro environment is likely
to cast a shadow on the overall recovery targets indicated by the management.
Credit growth in line with industry
The advances growth for BoI is likely to be around 17% in FY2012 as the credit
demand has dropped sharply due to the monetary tightening by the Reserve Bank
of India (RBI). Though the management expects some pick-up in advances in
H2FY2012, but it would be a challenge to grow 17% in the current fiscal. The
overseas advances are expected to grow at a higher rate (around 22% year on
year) than the domestic advances. We have trimmed our loan growth estimates by
100 basis points to 17%. However, the current account and savings account (CASA)
ratio, which had deteriorated in FY2011 due to a rise in the term deposits is likely
to improve by 100-150 basis points in FY2012.
The margin is likely to remain at sub-2.5% levels
We expect the net interest margin to be at sub-2.4-2.5%
levels in FY2012 due to an increase in the cost of funds
and a reversal of the interest on the NPAs. During
Q1FY2012 the net interest margin of the bank had declined
to 2.19%, which was the lowest among its peer banks.
Going forward, the slower credit growth and the rising
cost of deposits will add pressure on the bank’s margins.
Valuations and outlook
BoI continues to struggle with asset quality pressures that
have taken a toll on its earnings growth. Since the bank’s
loan book is relatively more exposed to the sensitive
segments (SEBs, SMEs, aviation, restructured loans etc),
it could throw negative surprises on the NPA front. We,
therefore, raise our credit cost estimates to 95 basis points
for FY2012 and to 100 basis points for FY2013. We are
further downgrading our estimates by 4% and 7% for
FY2012 and FY2013 respectively to factor the increase in
the NPA provisions and the slower business growth. We
also downgrade our rating on the bank to Hold from Buy
with a revised price target of Rs350 (valuing it at a 10%
discount to FY2013E book value due to the rising concerns
about its asset quality).
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