Bank of India: Focus shifts to recoveries :Kotak Sec,

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Bank of India (BOI)
Banks/Financial Institutions
Focus shifts to recoveries. We expect recovery trends at BoI to improve after nearly
5% slippages in 2QFY12. Results were disappointing as margin improvement and
healthy growth in non-interest income were largely offset by substantially higher
provisions, especially write-offs for some of the new slippages. Revise earnings
downwards; current valuations (1X FY2012E book) are inexpensive, maintain BUY with
TP of `450 (`470 earlier). Stability in slippages would, however, be key sensitivity for
stock performance.
Volatility continues with higher provisions but we see select positives from the results
BoI performance continues to show volatility—20% yoy decline in profits in 2QFY11 led by higher
provisions despite an impressive 16% yoy growth in revenues. Key positives that we see in the
current quarter which should slowly offset the higher slippages, viz.
(1) NIMs improved 25 bps qoq despite higher slippages that resulted in income de-recognition
equivalent to about 15 bps.
(2) Recovery trends are showing improvement – contributing to higher non-interest income as well
as reducing gross NPLs.
(3) Most of the slippages in the current quarter appear to have been written off. New provisions
can be used to improve coverage ratios.
We revise our estimates by 10-16% factoring higher loan-loss provisions and lower loan growth
for FY2012-13E. Valuations are undemanding at 1.0X book and 8X FY2012E EPS for RoEs in the
range of 18% levels and 18% earnings CAGR for FY2011-13E. Retain BUY with TP of `450 (`470
earlier). Weakness in corporate loan portfolio continues to remain a key risk to our earnings.
Slippage rises to 5% of loans: system transition and restructured loans key drivers
Gross NPLs increased by 13% qoq as the bank wrote off loans very aggressively, resulting in a
lower increase in gross NPLs qoq despite such a large slippage. After about 1% write-offs, gross
NPLs were at `65 bn as of September 2011 (3% of loans) as compared to `58 bn (2.7% of loans)
as of June 2011. Net NPLs increased by 58% qoq to `42 bn (2% of loans).
Slippages for the quarter were at 5.3%, mainly migration-led and from restructured loans. Nearly
60% of the loans slipped for the quarter were below `1 mn. About 20% of the total slippages
were from restructured loans. Outstanding break-up of NPLs, however, does not suggest a sharp
rise in all the above-mentioned slippage indicating a higher share of write-offs (largely technical)
from this portfolio (management is targeting 65% recovery from this portfolio).


As the bank has already made substantial provisions in this portfolio, we expect new loanloss
provisions to improve coverage ratios over the next few quarters. Provision coverage,
including technical write-off, has come off to 59% from 67% in June 2011.
Sharp improvement in NIM led by re-pricing of domestic loans
NIMs for the quarter improved 25 bps qoq to 2.4% led by an impressive 34 bps
improvement in domestic business to 2.8% while the international business reported flat
margins at 1.2%. The sharp improvement in domestic margins has been led by loan repricing
which reported an impressive 85 bps improvement qoq despite the bank reporting
large slippages in the current quarter (15 bps impact). Domestic cost of funds increased by
about 20 bps qoq.
We believe that higher recoveries (as against the current trend of higher slippages) can
results in further improvement in NIM over the next couple of quarters. The bank has
adequate cushion as the domestic CD ratio is currently at 65%, one of the lowest on the
Street. However, BoI’s NIM performance has been volatile and we continue to keep a fairly
conservative NIMs estimate (flat NIMs in 2HFY12 and 35 bps decline in FY2012E). However,
the management is focusing on improving NIMs by another 15 bps in 2HFY12E.
Muted business performance; CASA ratio improves 90 bps qoq to 31%
Loan book as of September 2011 grew 18% yoy to `2.2 tn (1% YTD) skewed towards
international loans—domestic loans grew by 9% yoy and international loans grew by 49%
yoy. Domestic loans have witnessed sharper growth in the corporate segment (partly due to
reclassification of agriculture and SME loans). Deposits grew 24% yoy to `3.0 tn (2% qoq)
and overall CASA growth was slower at 13% yoy at `767 bn. CASA ratio improved 340 bps
yoy to 31%.
Other operational highlights for the quarter
􀁠 BoI non-interest income increased by 44% yoy to `8.4 bn in 2QFY12 on the back of
higher income from treasury and recoveries. Income from treasuries was fairly strong at
`1.5 bn while recoveries tripled yoy. However, core fee income growth was weak at 11%
yoy while forex income grew 34% yoy. We continue to maintain a relatively slower fee
income growth compared to loan growth at 10% CAGR for FY2012-13E for the bank.
􀁠 The bank is reasonably well-capitalized with tier-1 capital at 8.3% (excluding 1HFY12
profits) and overall capital adequacy at 12.0%. Qoq improvement in tier-1 despite
balance sheet growth is due to reduction in risk weights of investments.
􀁠 The bank has taken an MAT benefit (awaiting clarifications) along with the benefit arising
from higher provisions for reducing the overall tax rate for 1HFY12.