Bank of India -Turnaround priced in; initiate with UNDERPERFORM:: Standard Chartered Research,

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Bank of India
Turnaround priced in; initiate with UNDERPERFORM


 We initiate coverage with UNDERPERFORM and price
target of Rs430, based on 1.5x P/BV.
 BoI has outperformed the Sensex by 17% over the past
three months, driven by strong 3Q earnings and
expectations that earnings will sustain.
 While we believe that concerns about its asset quality
are behind us and the earnings momentum is likely to
continue, we believe these improvements have already
been priced in, following the run up in stock price.
 Strong 4Q earnings on a low base could act as a
positive trigger for the stock in the short term.
Earnings growth and asset quality likely to stabilize –
BoI reported a huge decline in earnings in FY10 due to high
NPL formation. Furthermore, the earnings recovery in 9M
FY11 was volatile with good earnings growth in 1Q FY11
and 3Q FY11 but weak earnings growth in 2Q FY11. Going
forward, we expect new NPL formation to ease as most of
the restructured loans have seasoned.
Asset quality turnaround to provide cushion –
Turnaround in asset quality is likely to also provide cushion
to declining NIMs as NIMs in FY10 were under pressure
due to higher NPLs on which the bank had to stop accruing
interest. We expect BoI to report earnings growth of 30% in
FY12E supported by an already strong growth of 54% in
FY11E. Earnings growth looks high partly because of a low
base. In FY10, BoI’s earnings declined 42% yoy.
Valuation: To trade at a discount to PNB/BoB – Our price
target is based on 1.5x FY12E P/BV. The five-year average
multiple for BoI is 1.4x. Over FY07-09, BoI traded at a
significant premium to other banks due to faster-than-sector
loan and earnings growth. However, following the sharp rise
in NPLs in FY10, valuations suffered and BoI started trading
at a discount to the other large banks such as BoB and
PNB. We expect BoI to continue to trade at a discount to
BoB and PNB till it re-establishes a consistent track record
of good earnings growth with stable asset quality.
Risks – Faster-than-expected loan growth and lower-thanexpected
slippages are the key upside risks. Higher-thanexpected
rise in interest rates and higher-than-expected
slippages are the key downside risks.


Investment argument and valuation
Valuation
Our price target of Rs430 is based on 1.5x FY12E P/BV. We have used sustainable RoE of 16%,
cost of equity of 13.0% and sustainable growth rate of 6%. BoI currently trades at 1.6x FY12E
P/BV and has traded at an average multiple of 1.4x over the past five years. Over FY07-09, BoI
traded at a premium to other large state-owned banks like BoB and PNB on the back of higherthan-
sector growth in loans and earnings. However, starting 4Q FY09, valuations suffered as
BoI’s asset quality deteriorated significantly. With recovery in earnings in FY11, BoI’s discount to
other large banks has narrowed. We believe BoI will continue to trade at a discount to BoB and
PNB till it re-establishes a consistent track record of earnings growth and improvement in asset
quality. BoI’s quarterly earnings performance in 9M FY11 was volatile even on a low base. While
earnings growth in1Q FY11 and 3Q FY11 was strong, it was weak in 2Q FY11.
Our UNDERPERFORM rating on the stock reflects our view that expectations of strong earnings
growth over FY12-13E are already priced in after the sharp run up in stock price over the last
three months. The stock has outperformed the Sensex by 17% over the past three months.


Company profile
Bank of India is a state-owned bank with the government holding 64.5% of total equity capital. It
has a domestic branch network of 3,200 branches and 1,300 ATMs. It has a large overseas
presence, with over 29 offices in 18 countries. International operations account for 22% of overall
loan book.
Management team
Chairman & Managing Director: Alok Kumar Misra
He was the Chairman and Managing Director of Oriental Bank of Commerce and has also served
as Executive Director of Canara Bank prior to joining BoI.
Executive Director: B.A. Prabhakar
Prior to the present assignment, he was General Manager with Bank of Baroda, looking after its
treasury operations. Earlier, he served as the Chief Executive of Bank of Baroda’s operations in
the United Kingdom.
Executive Director: N. Seshadri
Took over as Executive Director of Bank of India with effect from 1 Nov ’10, before which he was
General Manager at Canara Bank, which he had joined as an officer in 1975. He holds an MBA
and is a certified Associate of the Indian Institute of Bankers.