Challenges persist- Key highlights from our interaction with Bank of India’s (BOI) management :: HDFC Securities

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Challenges persist
Key highlights from our interaction with Bank of
India’s (BOI) management are as follows:
 Asset quality: Slippages are expected to decline to ~Rs
25bn (vs. Rs 30bn in 2Q, 3% ann.) with one large AC of
~Rs 5bn. Fresh restructuring for 3Q is expected to rise
marginally to Rs 15-16bn (vs. Rs 14bn in 2Q). However,
BOI positively surprised with its guidance on high
reductions of Rs 20bn (vs. Rs 13.8bn in 2Q), led by
combination of recoveries/upgrades in vintage & newer
A/Cs.
 Business growth: BOI management hinted at moderate
domestic loan growth (67% of total) of ~14% led by
lower off-take in large corporate segment. Domestic
deposits are expected to grow at healthy ~16% YoY led
by strong growth in Retail TD.
 NIM to remain flat: Despite lower slippages and
recoveries in vintage A/Cs, bank conservatively guides
for flat NIM of 2.3% (with positive bias, with some
improvement in foreign NIM). Though for 4Q bank
expects NIM to improve driven by benefits of recent
cut in deposit rates.
 Other highlights : Lower wage hike assumption of a
mere 10.5% and higher pension discount rate at ~9% is
expected to keep the staff cost elevated in H2FY15.
Further, shift to the revised LIC mortality table, would
lead to an additional cost of Rs 6bn. Handsome treasury
gains of (Rs 2bn+) are expected to be utilized to shore
up PCR &/or provide for counter cyclical buffer.
View and Valuation
 The recent regulatory relief: (a) raising long term infra
bonds (July-14) with measured exemption of regulatory
requirements (CRR/SLR/PSL) and (b) flexible structuring
guidelines are expected to ease the concerns of ALM
and incremental stress formation. BOI remains one of
the major beneficiaries of the above guidelines given its
large infra book and elevated proportion of stressed
assets.
 However, given lower tier I capital, high dilution risk
looms large for BOI. We estimate capital requirement of
Rs 175bn over FY16-19E i.e. ~90% MCap. Thus capping
ROE at 12-13% for near to medium term.
 Despite factoring NIM improvement (avg. 2.3% FY15-
17E), better treasury gain and relatively lower stress
addition (slippages/provisioning cost of avg. 2.2/1.1%
FY15-17E vs. 2.7/1.5% in FY14), RoA shows no sign of
major uptick. Maintain NEUTRAL with TP revised
upward to Rs 330/sh (0.8x FY17E ABV) as we rollover to
FY17.
LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010496