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Bank of India
Lost all hope
Event
Not worth owning it and losing your sleep, in our view, downgrade to
Underperform: We downgrade Bank of India to Underperform from Neutral
and cut our TP by 30%+ to Rs275. We also cut our earnings sharply by 20%.
Persistent asset quality issues are likely to hamper stock performance and
valuations may remain subdued.
Impact
Asset quality – consistently bad, no disappointments on that front: Bank
of India’s asset quality has been consistently bad and in our view
management guidance of lower slippages has lost its meaning as they have
time and again failed to deliver. Slippages have been stubbornly high – the
average slippage ratio over the past 9 quarters has been at 2.3% of
advances. With no cushion on the NPL coverage ratio, we expect provisioning
levels will remain high. The management themselves in their first quarter
analyst meeting admitted that there is expected to be continued pressure on
asset quality and they expect more NPLs and restructurings to happen. We
expect stressed assets as a % of net-worth to shoot up from 70% in FY11 to
125% levels by FY13E.
Low CASA worries us: Bank of India’s CASA has also been under pressure
considering that the CASA ratio now stands at a level of 30% – one of the
lowest amongst large banks. 1QFY12 NIMs at 2.20% were dismally low and
management guidance for full year NIMs at 2.50%% looks like a tall target at
this point in time. We have factored in 2.5% NIMs for FY12E inline with
management guidance. Downside to our estimates can’t be ruled out.
Equity dilution imminent, poor return ratios: The Tier-1 ratio currently at
8% is expected to be sub-8% by the end of the year. We do expect equity
dilution to happen in FY13E. We haven’t factored it into our estimates. So
RoE adjusted for dilution could be much lower than the forecasted 14% for
FY13E. ROAs are expected to be sub-80bps.
Earnings and target price revision
We cut our earnings by 20% for FY13E and FY14E mainly on account of
higher credit costs. We cut our TP by 34% to Rs275 mainly on account of
reducing our target multiple from 1.2x to 0.9x. The reduction is on account of
lower ROE and lower earnings growth.
Price catalyst
12-month price target: Rs275.00 based on a Gordon growth methodology.
Catalyst: Pressure on asset quality: increase in NPLs and restructured assets
Action and recommendation
An avoidable PSU bank – Cheap could get cheaper too: The stock does
look cheap at 0.8x FY13E P/BV. However one shouldn’t ignore the exposures
at risk which could be conveniently masked through restructuring. We believe
valuations need to be looked at in the context of stressed asset proportions.
Underperform with TP of Rs275.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bank of India
Lost all hope
Event
Not worth owning it and losing your sleep, in our view, downgrade to
Underperform: We downgrade Bank of India to Underperform from Neutral
and cut our TP by 30%+ to Rs275. We also cut our earnings sharply by 20%.
Persistent asset quality issues are likely to hamper stock performance and
valuations may remain subdued.
Impact
Asset quality – consistently bad, no disappointments on that front: Bank
of India’s asset quality has been consistently bad and in our view
management guidance of lower slippages has lost its meaning as they have
time and again failed to deliver. Slippages have been stubbornly high – the
average slippage ratio over the past 9 quarters has been at 2.3% of
advances. With no cushion on the NPL coverage ratio, we expect provisioning
levels will remain high. The management themselves in their first quarter
analyst meeting admitted that there is expected to be continued pressure on
asset quality and they expect more NPLs and restructurings to happen. We
expect stressed assets as a % of net-worth to shoot up from 70% in FY11 to
125% levels by FY13E.
Low CASA worries us: Bank of India’s CASA has also been under pressure
considering that the CASA ratio now stands at a level of 30% – one of the
lowest amongst large banks. 1QFY12 NIMs at 2.20% were dismally low and
management guidance for full year NIMs at 2.50%% looks like a tall target at
this point in time. We have factored in 2.5% NIMs for FY12E inline with
management guidance. Downside to our estimates can’t be ruled out.
Equity dilution imminent, poor return ratios: The Tier-1 ratio currently at
8% is expected to be sub-8% by the end of the year. We do expect equity
dilution to happen in FY13E. We haven’t factored it into our estimates. So
RoE adjusted for dilution could be much lower than the forecasted 14% for
FY13E. ROAs are expected to be sub-80bps.
Earnings and target price revision
We cut our earnings by 20% for FY13E and FY14E mainly on account of
higher credit costs. We cut our TP by 34% to Rs275 mainly on account of
reducing our target multiple from 1.2x to 0.9x. The reduction is on account of
lower ROE and lower earnings growth.
Price catalyst
12-month price target: Rs275.00 based on a Gordon growth methodology.
Catalyst: Pressure on asset quality: increase in NPLs and restructured assets
Action and recommendation
An avoidable PSU bank – Cheap could get cheaper too: The stock does
look cheap at 0.8x FY13E P/BV. However one shouldn’t ignore the exposures
at risk which could be conveniently masked through restructuring. We believe
valuations need to be looked at in the context of stressed asset proportions.
Underperform with TP of Rs275.
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