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We met the management of Bank of India. Key takeaways:
Bank of India’s expects advance to grow at 100-150bps higher than the system with SME and mid-corporate to be the main growth drivers. At industry levels, fresh disbursements seem constrained since the last 6-9 months as Infrastructure lending has dried up, though demand for working capital loans is still high.
Industry wide demand deposits are witnessing contraction. As per the bank, this is a seasonality effect and CASA would again start inching up. Hence, margins are expected to fall in Q1-Q2FY12. Floating rate loans comprise ~60-65% of total loans.
The bank reported slippages of INR42bn in FY10 & INR29bn in FY11 and targets to reduce slippages at 1.25% of the book. However, management has taken various steps to counter slippages by good recoveries. Outstanding restructured advance portfolio stands at INR106bn so additional provision of INR1.6bn is expected in 1QFY12 due to hike in standard asset provisioning norms by RBI. The bank has already migrated loans above INR1.0mn to CBS based NPA recognition and balance is expected to be migrated in next two quarters. Some slippages are expected due to migration.
Infrastructure exposure is at around INR204bn out of which credit to the power sector stands at INR120-130bn. The bank has not witnessed any slippages so far and do not expect any major delinquencies in this sector.
The bank had created two new verticals: Project Finance and Transaction Banking. Till now, both verticals are doing well and hence share of fee income is expected to improve. The bank plans to open 15 dedicated retail service centers and is currently hiring for these service centers. Hence, it expects to see traction in retail lending. In order to avoid any conflict of interest, marketing and operation teams would be separate and the bank would focus would be on low turnaround time while maintaining a tab on asset quality.
BOI is looking to open 250 branches in FY2012, out of which around 35-40% will be at semi-urban and rural areas. It plans to open branches in New Zealand, Canada, Uganda, Botswana, South Africa etc. However, there is no intention to explore any M&A opportunity in overseas markets. Overall, the bank expects to hire around 5,500 employees this fiscal. However, as ~2,000 people are due to retire; net additions would be around 2,500-3,000 (after considering the normal attrition).
Catalysts Robust credit growth in SME & large corporate segments along with improvement in CASA franchise. Risk Continued high slippages or margin compression because of higher proportion of term deposits under current interest rate scenario. Valuations
The stock trades at a valuation of 1.5x FY12E ABV and 7.7 FY12E EPS, which seems fair given the strong expected NPA recoveries. Continuous high slippage in the next few quarters is a key risk for the bank, as it would dampen its profitability significantly. We believe that strong rebound in earnings in FY11-13E and improvement in ROE is already factored in the price. We expect the stock to trade at 1.5x FY12E, which yields a price target of INR390 (Previous target INR440). Hence, maintain our Hold recommendation on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We met the management of Bank of India. Key takeaways:
Bank of India’s expects advance to grow at 100-150bps higher than the system with SME and mid-corporate to be the main growth drivers. At industry levels, fresh disbursements seem constrained since the last 6-9 months as Infrastructure lending has dried up, though demand for working capital loans is still high.
Industry wide demand deposits are witnessing contraction. As per the bank, this is a seasonality effect and CASA would again start inching up. Hence, margins are expected to fall in Q1-Q2FY12. Floating rate loans comprise ~60-65% of total loans.
The bank reported slippages of INR42bn in FY10 & INR29bn in FY11 and targets to reduce slippages at 1.25% of the book. However, management has taken various steps to counter slippages by good recoveries. Outstanding restructured advance portfolio stands at INR106bn so additional provision of INR1.6bn is expected in 1QFY12 due to hike in standard asset provisioning norms by RBI. The bank has already migrated loans above INR1.0mn to CBS based NPA recognition and balance is expected to be migrated in next two quarters. Some slippages are expected due to migration.
Infrastructure exposure is at around INR204bn out of which credit to the power sector stands at INR120-130bn. The bank has not witnessed any slippages so far and do not expect any major delinquencies in this sector.
The bank had created two new verticals: Project Finance and Transaction Banking. Till now, both verticals are doing well and hence share of fee income is expected to improve. The bank plans to open 15 dedicated retail service centers and is currently hiring for these service centers. Hence, it expects to see traction in retail lending. In order to avoid any conflict of interest, marketing and operation teams would be separate and the bank would focus would be on low turnaround time while maintaining a tab on asset quality.
BOI is looking to open 250 branches in FY2012, out of which around 35-40% will be at semi-urban and rural areas. It plans to open branches in New Zealand, Canada, Uganda, Botswana, South Africa etc. However, there is no intention to explore any M&A opportunity in overseas markets. Overall, the bank expects to hire around 5,500 employees this fiscal. However, as ~2,000 people are due to retire; net additions would be around 2,500-3,000 (after considering the normal attrition).
Catalysts Robust credit growth in SME & large corporate segments along with improvement in CASA franchise. Risk Continued high slippages or margin compression because of higher proportion of term deposits under current interest rate scenario. Valuations
The stock trades at a valuation of 1.5x FY12E ABV and 7.7 FY12E EPS, which seems fair given the strong expected NPA recoveries. Continuous high slippage in the next few quarters is a key risk for the bank, as it would dampen its profitability significantly. We believe that strong rebound in earnings in FY11-13E and improvement in ROE is already factored in the price. We expect the stock to trade at 1.5x FY12E, which yields a price target of INR390 (Previous target INR440). Hence, maintain our Hold recommendation on the stock.
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