We met Bank of India (BOI) to discuss its balance sheet growth, margins and asset quality. Sequential credit expansion in the domestic business is likely to be significant in Q4 FY13 driven by Retail and Agriculture advances. Domestic C/D ratio is expected to improve from the current level of 70%. With healthy savings account addition, the bank is hopeful of improving domestic CASA ratio to 34% by the year-end. Continuous reduction of high cost bulk deposits and CDs would further improve deposits profile and lower cost of funds. Domestic NIM that has been depressed by higher delinquencies is estimated to marginally recover in the medium term notwithstanding recently announced base rate cut. Margin expansion is expected to be supported by robust upgrades/recoveries, resilient CASA, substantial decline in the share of high-cost deposits, slight improvement in C/D ratio and probable deposits rate cut in the near term. International NIM is also expected to recover from historical lows. We estimate overall loan and NII CAGR of 20% and 22% respectively over FY13-15.
Post improving materially in Q3 FY13, asset quality is likely to further recuperate in coming quarters. Bank expects sequentially lower slippages, stronger upgrades/recoveries and Gross NPL ratio below 3% in Q4. Even restructuring is expected to be significantly lower than Q3. Despite factoring muted fee income growth, earnings would likely grow in-line with NII over FY13-15 aided by relatively modest growth in provisioning. Capital position remains weak with Tier-1 estimated at 8.2% by the year-end including the insignificant infusion of ~Rs8bn by the Government. Bank plans to raise substantial capital in H1 FY14 (not factored in our estimates) to boost capital adequacy for longer term growth.
We have a cautious stance on PSU Banks based on belief that medium term earnings would remain under pressure due to material delinquencies and higher provisioning. Therefore, despite reasonable valuation of 0.84x FY15 P/adj.BV and assuaging management commentary, we rate BOI as Market Performer with 9-month target price of Rs350.
|Y/e 31 Mar (Rs m)||FY12||FY13E||FY14E||FY15E|
|Total operating income||116,346||125,488||147,587||174,605|
|yoy growth (%)||11.3||7.9||17.6||18.3|
|Operating profit (pre-provisions)||66,939||71,981||85,519||101,985|
|yoy growth (%)||7.6||4.8||21.4||22.3|
|Adj. BVPS (Rs)||279.7||288.2||328.9||379.3|
|Dividend yield (%)||2.3||2.3||2.4||3.0|
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