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● We recently met Bank of India’s CFO. Outlook for the current
quarter remains weak for the bank, driven by muted growth, weak
margins and continued high slippages.
● The bank, which witnessed a sharp decline in 1Q12 margins (down
75 bp QoQ), expects NIMs to improve by 20-25 bp this quarter (to
2.4% levels but still significantly weaker than peers). Credit growth
is likely to stay muted this quarter (flat QoQ; ~18% YoY).
● Management expects slippages to be high even in 2Q (~3% levels
vs 3.2% in 1Q), driven by movement to system NPLs (loans
year should be at 2% levels, leading to 0.8% credit costs.
● While valuation is at a 32% discount to its five-year average (1.0x
FY12E book value), given the continued asset quality pressure,
muted margins and low Tier 1 (8.0% in 1Q) (likely to be a
constraint on growth), we maintain our NEUTRAL rating on the
stock. We reduce our target price from Rs419 to Rs353 (based on
1.0x one-year forward book).
2Q likely to be muted
NIMs witnessed a sharp 75 bp QoQ drop in 1Q12, driven by rising
funding costs and interest reversal from NPLs (25 bp NIM impact).
The bank has raised PLR by 75 bp in July 2011 and expects margins
to recover by 20-25 bp in the current quarter to ~240-250 bp despite
deposit re-pricing (1Q had large interest income reversal). NIMs on
the international book are currently at 1.2% and the bank expects
them to improve to 1.3% as share of ECBs is increasing. Loan growth
has been muted this quarter (flat QoQ, 18% YoY) and bank has been
focussing on improving its liability mix (the bank has shed some bulk
deposits). CASA share has picked up during the quarter to 32% (from
30% in 1Q12). Tier 1 is relatively low at 8.0% and management has
sought government approval for Rs40 bn of equity infusion (timing and
mode of the same remain uncertain).
Slippages to be high even in 2Q
Gross slippages were a high 3.2% in 1Q12. As highlighted in the last
quarter’s guidance, management expects NPL slippages to remain
high even in 2Q (loans below Rs0.5 mn are yet to be shifted to
system-based NPLs). Agri loan slippages continue to persist but are
likely to be lower than last quarter and overall slippage could be as
high as 1Q. While the infrastructure book is not seeing stress
currently, it is likely that commencement date of some of the projects
will be pushed out (restructured). Bank exposure to commercial real
estate is relatively low (3.2% of loans) but lending to airlines is higher
than peer banks’ 2% of loans. There are no defaults yet on loans to
state electricity boards.
BOI’s international operations account for ~20% of its balance sheet.
However, management stated that it is not witnessing any stress on
these as these are primarily India linked—45% of loan book is buyers
credit, 35% will be ECBs (to Indian corporates) and only 20% is
overseas exposure (most of which is short dated trade finance).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● We recently met Bank of India’s CFO. Outlook for the current
quarter remains weak for the bank, driven by muted growth, weak
margins and continued high slippages.
● The bank, which witnessed a sharp decline in 1Q12 margins (down
75 bp QoQ), expects NIMs to improve by 20-25 bp this quarter (to
2.4% levels but still significantly weaker than peers). Credit growth
is likely to stay muted this quarter (flat QoQ; ~18% YoY).
● Management expects slippages to be high even in 2Q (~3% levels
vs 3.2% in 1Q), driven by movement to system NPLs (loans
year should be at 2% levels, leading to 0.8% credit costs.
● While valuation is at a 32% discount to its five-year average (1.0x
FY12E book value), given the continued asset quality pressure,
muted margins and low Tier 1 (8.0% in 1Q) (likely to be a
constraint on growth), we maintain our NEUTRAL rating on the
stock. We reduce our target price from Rs419 to Rs353 (based on
1.0x one-year forward book).
2Q likely to be muted
NIMs witnessed a sharp 75 bp QoQ drop in 1Q12, driven by rising
funding costs and interest reversal from NPLs (25 bp NIM impact).
The bank has raised PLR by 75 bp in July 2011 and expects margins
to recover by 20-25 bp in the current quarter to ~240-250 bp despite
deposit re-pricing (1Q had large interest income reversal). NIMs on
the international book are currently at 1.2% and the bank expects
them to improve to 1.3% as share of ECBs is increasing. Loan growth
has been muted this quarter (flat QoQ, 18% YoY) and bank has been
focussing on improving its liability mix (the bank has shed some bulk
deposits). CASA share has picked up during the quarter to 32% (from
30% in 1Q12). Tier 1 is relatively low at 8.0% and management has
sought government approval for Rs40 bn of equity infusion (timing and
mode of the same remain uncertain).
Slippages to be high even in 2Q
Gross slippages were a high 3.2% in 1Q12. As highlighted in the last
quarter’s guidance, management expects NPL slippages to remain
high even in 2Q (loans below Rs0.5 mn are yet to be shifted to
system-based NPLs). Agri loan slippages continue to persist but are
likely to be lower than last quarter and overall slippage could be as
high as 1Q. While the infrastructure book is not seeing stress
currently, it is likely that commencement date of some of the projects
will be pushed out (restructured). Bank exposure to commercial real
estate is relatively low (3.2% of loans) but lending to airlines is higher
than peer banks’ 2% of loans. There are no defaults yet on loans to
state electricity boards.
BOI’s international operations account for ~20% of its balance sheet.
However, management stated that it is not witnessing any stress on
these as these are primarily India linked—45% of loan book is buyers
credit, 35% will be ECBs (to Indian corporates) and only 20% is
overseas exposure (most of which is short dated trade finance).
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