Bank of India -Neutral: High price for a slow recovery: HSBC

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Bank of India (BoI)
Initiate at Neutral: High price for a slow recovery
 Slow recovery after excesses of FY08/09 plus premium
valuations imply unexciting returns
 Profitability expanding but below peers, valuations on par.
Significant positive surprises unlikely near term
 Initiate at Neutral; INR546 target implies 10% potential return





Paying the price of excess growth. In FY10, Bank of India paid dearly for excess growth
in the crisis years of FY08/09, both in terms of margins and asset quality, and as a result
its stock significantly underperformed peers from 2QFY10. While margins recovered
partially in 1HFY11 and NPL ratios have stabilised after huge initial slippage, BoI may
need a few more quarters to fully emerge from its slump.

Earnings prospects already priced in. We look for a 37% FY10-13e EPS CAGR, 8-
10% higher than the street based on our higher expectations for loan growth, margins and
asset quality. However, we expect margin and asset quality improvement to be gradual
over the next 3-4 quarters, despite the credit upcycle, and we think this is unlikely to
translate into better stock performance given valuations are already close to par with peers
despite lower return ratios. Near-term risks could manifest in higher than expected NPLs,
keeping investor confidence subdued.

We initiate on BoI with a Neutral rating and target price of INR546 as our more
optimistic earnings outlook is already reflected with the stock trading close to par on PE
and PB relative to peers. We value BoI using a weighted average of target PE of 6.7x and
target PB of 1.4x applied to 24-month forward earnings as well as an EPM fair value. We
arrive at a target price of INR546, which implies 10% potential return including dividend.

Key risks: Our stance would become more bullish if BoI surprises positively with faster
asset quality recovery, in which case there would be scope for stock outperformance.
However, on the downside the current tight liquidity environment could result in worse
than expected margins. From a sector perspective, we remain positively oriented on private
sector banks with our top picks being the smaller names including Yes and IndusInd Bank.