Bank of India - TP: INR340 Neutral :: Motilal Oswal

Asset quality volatile; focus on de-bulking balance sheet
Highlights of FY12 Annual Report
 Net slippages increased significantly from INR9.8b in FY11 to INR37b in FY12. However,
aggressive write-offs (INR24b v/s INR8.1b) helped to contain GNPA increase.
 In FY13, Bank of India (BOI) intends to continue focusing on de-bulking its balance
sheet. It expects the Retail and SME segments to drive loan growth.
 Infrastructure and Electricity constituted 22% of its incremental funded exposure,
and is at 11% of overall exposure.
 Foreign currency translation reserve stood at INR9.6b (INR17/share).
 Concerns over macro-economic environment and higher proportion of stress loans
compared to peers will keep valuations under check. Maintain Neutral.

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Weak asset quality performance: Slippages increased significantly from INR29b
in FY11 to INR54b (slippage ratio of 2.5%). Though recoveries improved (INR12.1b
v/s INR8.9b), upgradations faltered (INR4.9b v/s INR10.4b). Net slippages
increased from INR9.8b to INR37b (1.7% of opening loans), translating into higher
credit cost (100bp v/s 65bp in FY11) and lower margins. In FY12, Bank of India
(BOI) restructured loans of INR91.8b (3.7% of overall loans), of which INR15.6b
pertain to the Corporate Debt Restructuring (CDR) scheme. However, Air India
(INR22b), is likely to be restructured in 1QFY13.
Focus to be on de-bulking of balance sheet: In FY12, overall loans grew 17% to
INR2.5t. Domestic loans grew 8% to INR1.76t, driven by Agriculture (+33%) and
Retail (+15%). The Large Corporate and SME segment grew 7%. The management
intends to focus more on the SME and Retail segments in FY13, and pare the
share of loans to the Large Corporate segment gradually from 47% in FY12 to 42%.
Strong growth in exposure to Power and Infrastructure: Overall funded exposure
grew 16% in FY12. This was partially driven by strong growth in Electricity (+53%;
4.5% of overall exposure) and Infrastructure (+30%; 6.7% of overall exposure).
Together, these two segments constituted 22% of incremental exposure. Growth
in Gems & Jewelry was strong at 45%+, but the segment accounted for just 2% of
overall exposure. Exposure to Commercial Real Estate declined by 10%.
Other highlights: (1) Foreign currency translation reserve of INR9.6b (INR17/
share); we have adjusted for this in our BV calculation, (2) Overall CAR at 11.95%,
with tier-I ratio at 8.6% (core tier-I at 7.7%), (3) Discounting factor for pension
liability up 50bp to 9% – one of the highest among peers.
Asset quality risk persists; maintain Neutral: Volatile asset quality performance
has been resulting in high volatility in margins and credit cost. Further, standard
restructured loans stood at 5.8% of overall loans and the bank is yet to restructure
some high value accounts like Air India (exposure of INR22b). Restructured loans
are likely to reach 7-8% of overall loans by the end of 1HFY13. Concerns over
macro-economic environment and higher proportion of stress loans compared
to peers will keep valuations under check. Maintain Neutral.