Bank of India (Q3 FY14)

Bank of India’s credit growth was materially higher than expected at 27% yoy. Domestic credit expanded by 25% yoy with 20%+ growth registered in all the segments. Deposits grew by 30% yoy and the CASA ratio was stable sequentially at 30%. Bulk Deposits and CDs combined formed 9% of total deposits as against 19% in the corresponding quarter of the last year. With capital position of the bank weak at 8.1% Tier-1 ratio (under Basel II) and internal capital generation at sub-optimal level (impacted by depressed NIM and higher provisioning), the loan growth is likely to decelerate significantly from the current level. We estimate a modest 15% advance CAGR for BOI over FY14-16. 

Global NIM was stable at 2.9% in Q3 FY14, in-line with our expectation. Domestic NIM marginally declined on account of lower yield on advances; which was impacted by higher slippages and restructuring during the quarter. Cost of deposits was stable qoq in the domestic business. International NIM improved driven by both decline in funding cost and expansion in lending yield. In the medium term, we expect NIM to remain depressed around current levels owing to persistent creation of impaired assets and weak pricing power. 

Fee income growth was healthy at 21% yoy. Treasury performance was better than previous quarter with gains at Rs1.27bn. Opex growth remained elevated at 20% yoy due to higher provisioning related to employee benefits. The cost/income ratio deteriorated for the second consecutive quarter to 43.8%.

Both slippages and fresh restructuring during the quarter was higher than our expectation at Rs17.5bn and Rs11.5bn respectively. Collectively, the stressed assets creation was higher than the previous two quarters. However, Gross NPL ratio improved by 12bps qoq to 2.8% on account of sale of substantial NPLs (Rs16-17bn) to the ARCs. Credit cost was elevated during the quarter at 140bps and the PCR was maintained at 64% (relatively at higher level than most other public banks). While bank expects impaired assets creation to remain elevated in the coming few quarters, it also hopes to contain the increase in the GNPL level. 

On the back of below-expected operational performance in Q3 FY14 and higher slippages assumption for FY15/16, we downgrade the valuation multiple assigned to Bank of India. Consequently, our 9-12 month target price has been revised lower to Rs233. Our rating remains BUY.