Asset quality concerns refuse to die- BoI :: Centrum

Asset quality concerns refuse to die
BoI’s Q3FY13 core performance came largely in line though bottom-line
performance was below our expectations led by a spike in provisions. Though
slippages eased QoQ, it remained high at ~2% but was offset by aggressive
write-offs, optically improving %GNPA. We maintain Neutral rating with our
revised fair value estimate on the stock as we expect the stock to
underperform the sector and broader markets due to volatility in the asset
quality matrix.
NIM stable QoQ: The in line NII performance (up 11.7% YoY) was driven by a
sequentially flattish NIM along with 15.5% advances growth YoY. NIM stood
flattish QoQ as the benefit of lower cost of funds was offset by 35bps
contraction in loan yields (due to interest income reversal). While NIM can
improve in quarters to come, big-ticket restructuring or slippages remain a
key risk. We retain our conservative NIM assumptions (10 bps contraction over
an already weak NIM in FY12).
Asset quality, a mixed bag: Asset quality matrix remained a mixed bag with
%GNPA coming off by 34bps QoQ though led by high write offs (explaining
spike in provisions as well). The slippage rate at 1.9%, though lower than ~7% in
the previous quarter, is still high. Standard restructured assets now form 6.5% of
global loans though domestic restructured assets as % of domestic advances is
high at 8.4%. We maintain our view that the restructured assets are likely to rise
further in quarters ahead, though the quantum may be lesser. The management
once again exuded confidence over improving asset quality matrix though we
remain cautious.

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Credit growth moderates to 15.5%: Loan growth came in at 15.5% YoY with
domestic advances book expanding by 15.7% YoY. Within domestic segments,
growth was driven by agriculture (20% YoY) and corporate (18.4% YoY) while
SME book expanded by a tepid 4.5% YoY. For FY2013, the management
expects the credit book to grow by 17-18%.The bank is expecting capital
infusion of Rs8 bn from GoI, which along with profits for current fiscal should
shore up Tier I to 8.7% and hence support further loan expansion.
Weak non-Interest income: Non-interest income at Rs9.4bn, up 10% YoY,
was weak considering that CEB contracted by ~9% YoY. Importantly, the
positive growth was due to strong recoveries (up 32% YoY) and healthy forex
related income (up 46% YoY).
Remain Neutral: We continue to expect the stock to underperform industry
indices given the volatility in asset quality matrix. We have revisited our
earnings estimates and are revising the fair value estimate upwards to Rs400.
At the current market price of Rs355, the stock trades at 5.3x FY2014E EPS and
1.0x FY2014E ABVPS. Current valuations, in our view, largely factor in potential
benefit from anticipated upturn in economic activity and resulting expansion
in return ratios. We remain neutral on the stock given the volatility in asset
quality matrix and challenges to expansion in return ratios.