BANK OF INDIA: Times to remain challenging ::BNP Paribas

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Times to remain challenging
CHANGE
Initiate coverage at HOLD with a target price of INR327
We initi ate coverage of Bank of India (BoI) with a HOLD rating and a TP of
INR327 despite attractive valuations, as we don’t expect any strong
turnaround in overall profitability. We expect ROA to remain low at about
0.8% and ROE to remain contained at 15-17% through FY14, which is
lower than most of the peers we cover.
CATALYST
Turnaround in asset quality with strong recoveries and upgrades
BoI suffered the most in FY10/FY11 as 21% of its restructured assets
slipped into NPLs (industry average 12%). As a result, tier-1 ratio, which
was increased up via equity infusion in FY11, slipped back to pre-infusion
levels. So, we believe any turnaround in asset quality (high recoveries)
which shores up bottom line and the tier-1 ratio will be a key trigger.
VALUATION
Valuation discount likely to be sustained as return ratios lower
BoI trades at 0.9x FY13E P/ABV (average ROE of 15.6% over FY11-13E).
While valuation is way below long-term average multiple of 1.5x, we
remain concerned about BOI’s weak return ratios which we think warrant
a discount to peers. Upside risk to TP are higher-than-expected
recoveries from NPA and NIMs. Downside risk is further decline in NIMs.