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India Equity Research Reports, IPO and Stock News
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Investment thesis
We initiate coverage on Bank of India (BOI) with a “HOLD” rating, as in our view the bank’s varied woes are likely to keep the stock range-bound; it is currently trading at 0.9x FY13E BVPS. The stock has under-performed YTD on the back of asset quality concerns, consistent deterioration in its fundamental franchisee such as CASA and margins along with over hang from capital dilution – the bank is yet to recover from its aggressive growth during F2006-08
→ Asset quality pressure to remain and will increase in FY2013E, due to economic slowdown along with high interest rate we believe BoI remains the most vulnerable of the lot with its increased exposure in Infra, SME and SEBs.
→ We expect BOI to deliver 12% earnings CAGR over FY2012-14E and average RoE of 12%. However, earnings visibility is hampered by large AFS exposure of 37% though duration has been reduced in 1QFY11 to around 1.2 years.
→ In addition to the above timeliness of capital injection will be critical as GoI is going through tight liquidity, this can have additional overhang on the stock in the short term.
Valuation
BOI is currently trading at 0.9x FY13E book value, at a discount to PSU peers in our coverage. As we believe improvements in key metrics and implementation of robust risk systems would take time to fructify, we initiate coverage with a “HOLD” rating and a 3 stage DDM based weighted average 12-month price target of INR 304, implying 9% potential downside.
Key risks
Key upside risks to our target price and investment view:
→ the bank’s calibrated growth pace of 17%-18% translates into expansion in CASA and margins at a faster than expected pace; and
→ Lower-than-expected loan loss provisions as NPLs decline.
Key downside risks:
→ BOI is vulnerable to pressure on margins and MTM hit in a turning interest rate cycle; and
→ Higher-than-expected slippages from restructured loans into NPLs too could impact profitability.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Investment thesis
We initiate coverage on Bank of India (BOI) with a “HOLD” rating, as in our view the bank’s varied woes are likely to keep the stock range-bound; it is currently trading at 0.9x FY13E BVPS. The stock has under-performed YTD on the back of asset quality concerns, consistent deterioration in its fundamental franchisee such as CASA and margins along with over hang from capital dilution – the bank is yet to recover from its aggressive growth during F2006-08
→ Asset quality pressure to remain and will increase in FY2013E, due to economic slowdown along with high interest rate we believe BoI remains the most vulnerable of the lot with its increased exposure in Infra, SME and SEBs.
→ We expect BOI to deliver 12% earnings CAGR over FY2012-14E and average RoE of 12%. However, earnings visibility is hampered by large AFS exposure of 37% though duration has been reduced in 1QFY11 to around 1.2 years.
→ In addition to the above timeliness of capital injection will be critical as GoI is going through tight liquidity, this can have additional overhang on the stock in the short term.
Valuation
BOI is currently trading at 0.9x FY13E book value, at a discount to PSU peers in our coverage. As we believe improvements in key metrics and implementation of robust risk systems would take time to fructify, we initiate coverage with a “HOLD” rating and a 3 stage DDM based weighted average 12-month price target of INR 304, implying 9% potential downside.
Key risks
Key upside risks to our target price and investment view:
→ the bank’s calibrated growth pace of 17%-18% translates into expansion in CASA and margins at a faster than expected pace; and
→ Lower-than-expected loan loss provisions as NPLs decline.
Key downside risks:
→ BOI is vulnerable to pressure on margins and MTM hit in a turning interest rate cycle; and
→ Higher-than-expected slippages from restructured loans into NPLs too could impact profitability.
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