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Bank of India
Neutral
BOI.BO, BOI IN
Recoveries and upgrades to pick up but sharp
pullback prices in some positives
We met up with the management of Bank of India recently.
Management believes the recent concerns on asset quality post the
banking scam is overdone and expects asset quality to stabilise with pick
up in upgrades and recoveries. We expect ROAs to bounce back by FY12
but maintain Neutral given the sharp pullback over the last 10 days.
• Recoveries and upgrades to pick up: We see asset quality concerns
receding with lower slippages and tick up expected in upgradation and
recoveries. Management expects some large upgradations in next 1-2
qtrs that should aid asset quality improvement. we also believe that the
recent concerns on the banking scam was overdone as any large
disbursement is approved by the management committee with very
limited discretion left to an individual.
• Momentum to continue, margin to improve near term: 2Q11
margins for BOI was impacted by one-offs and margins are expected to
improve in 3Q. Though management expects some moderation in loan
growth, credit costs is expected to come off. Profit growth has been
strong in 1H11 and we expect the momentum to continue with ~40%
profit growth over FY10-12.
• Return ratios to bounce back in FY11-12: ROAs would jump to
>1.0% from 0.7% in FY10 and we believe FY10 was an aberration. The
improvement in ROAs would take profitability of BOI closer to the
larger PSU banks ex PNB.
• Maintain Neutral post sharp pull back: Though asset quality is
expected to turnaround, the ~15% pullback in the last 10 days limit any
large near term outperformance. Valuations gap with large peers have
narrowed to ~15% and hence we maintain our Neutral. Upside risks are
sharper than expected recovery in asset quality and key downside risk
would be lower margins as system liquidity continues to remain tight.
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