Bank of India - Operationally stabilising; NPAs to be watched • :: ICICI Securities, PDF link

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Operationally stabilising; NPAs to be watched
• PAT of | 786 crore, up 26% YoY was above estimates, largely owing
to higher-than-expected NII traction of 20% YoY | 3031 crore (I-direct
estimate: | 2600 crore)
• Healthy NII growth was due to expansion in margins to 2.31% from
2.16% in Q1 and healthy loan traction of 19% YoY to | 399288 crore
• Deposits growth YoY stayed at 20% levels at | 500875 crore
• As expected, slippages were lower QoQ at | 2971 vs. | 3777 crore.
Fresh RA was also lower QoQ at | 1358 crore vs. | 1630 crore.
However, due to lower recoveries & upgradation of | 1408 crore, the
net addition to GNPA was higher at | 1595 crore to | 14127 crore
Consolidation needed urgently
BoI is among the top four PSU banks in terms of loan size. Its global loan
book is at | 399288 crore as on Q2FY15 while it has a market share of
4.2% on domestic loans, which is | 268546 crore. The book is largely
skewed towards corporate (59% of domestic advances) followed by SME
(17%), agri (13%) & retail (10%). Foreign loans account for 33% of total
loans. Loans grew at a strong pace of 26% CAGR over FY07-11 before
consolidating for the next two years (FY12 & FY13) owing to asset quality
pressures wherein growth remained at ~14% CAGR. However, in FY14,
growth again picked up sharply to 28% YoY. We believe, with asset
quality deteriorating sharply (| 8811 crore slippages in FY14) & with Tier I
ratio of only 7.53%, it is prudent for the bank to resort to consolidation.
We have built in loan CAGR of 17% over FY14-16E to | 505553 crore.
No major improvement expected on margins
BoI’s overall margins stood at ~3% in FY09. However, since then,
margins have dipped to 2.31% as on Q2FY15 despite healthy CASA ratio
of ~30% during the period. This is owing to higher traction of 31% CAGR
in overseas advances (proportion increased to 31% from 21% in FY10)
wherein margins are lower at ~1.1%. Further, owing to increased
pressure on asset quality (GNPA ratio increased to >3.2% from 1.7% in
FY09) there was large interest reversal, thereby impacting NIMs
negatively. Going ahead, we expect NIM to remain steady at 2.3%.
Asset quality respite not expected in near term
Owing to the diversified nature of its loan book BoI’s asset quality stayed
at acceptable levels relatively with GNPA ratio of 2.35% until FY12.
However, in the past couple of years asset quality deterioration has been
faster with GNPA ratio rising to 3.2% as on FY14. Slippages increased to
| 8811 crore in FY14 vs. | 5401 crore in FY12. Restructured assets (RA) at
| 13557 crore account for 3.7% compared to industry average of 6-7%.
We expect NPA concerns to linger for at least next two quarters. We
estimate GNPA ratio of 3.2% (| 16546 crore) by FY16E.
Improvement in NIMs & NPAs key triggers; maintain BUY
BoI has a very similar profile to its peer BoB in terms of branch location,
asset size, overseas loans and CASA ratio. BoI’s RoE (25%) and RoA
(1.5%) in FY09 were superior to BoB. However, later on due to higher
credit cost and opex the yearly earnings of BoI declined to ~| 2600 crore
levels (average) over FY10-14 compared to ~| 4500 crore (average)
registered by BoB. Accordingly, BoI’s RoEs have fallen to 10.1% vs. BoB’s
RoE of 13%. For BoI, we maintain target multiple to 1.0x FY16E ABV from
(BoB valued at 1.4x) and maintain target price of | 317 as we factor in PAT
CAGR of 13% over FY14-16E. We maintain our BUY recommendation.

LINK
http://content.icicidirect.com/mailimages/IDirect_BankofIndia_Q2FY15.pdf