>BANK OF INDIA (DEUTSCHE BANK)

Analyst meeting takeaways

■ Consolidation and transition phase, maintain Hold
We believe that the long period of consistently high earnings growth for Bank of India is over. Loan growth is highly likely to moderate in the present sluggish environment, margins may remain under pressure even if they do not fall much, low-cost deposit ratio has failed to pick up for a long time and asset quality headwinds are increasing. An added element of uncertainty is an imminent CEO change in June’09. TP upside to the current price is also limited-Hold.

■ Admits to challenges but maintains a ~20% topline growth target for FY10
The management is targeting a 22% loan growth and 20% deposit growth for FY10. Though their medium term NIM target is 3%, they admit that there is pressure on spreads due to high cost of funds and yields dropping sharply. They believe that it could take still another two quarters for the high-cost deposits to run off. They also have the tough task of taking the low-cost deposit ratio (CASA) from 31% to 35% in FY10 – CASA had fallen in FY09 due to strong growth, high term deposit rates and an over-aggressive deposit mobilization campaign.

■ Asset quality headwinds visible; bank’s disclosures creditably transparent
BoI’s slippages have been rising both on a basic and lagged basis, and Q4FY09 NPL formation was high compared to historical trends. The bank provided the most succinct details on restructured assets that we have seen recently, and their classification norms are arguably conservative. However, the disclosures indicate significant stress: total restructured assets including pending applications 6.3% of loans, 98% of the restructuring bilateral instead of through the industry forum, and SMEs accounting for ~30% of the total restructuring.

■ Valuations and risks
We adopt a single-stage Gordon Growth model (P/BV-RoE) for valuing BoI, as we do for all PSU banks, leading to a rounded-off target price of INR250/share. Main downside risk includes sharp slowdown in international business and lower fee income growth. Key upside risk includes lower than expected wage revision and pension liabilities.

To see full report: BANK OF INDIA