>BANK OF INDIA (KR CHOKSEY)

INVESTMENT RATIONALE
Bank of India reported net profit of Rs.810.4 Crore during Q4FY09 in line with our expectations. During Q4FY09 bank reported a net profit of Rs.810.4 Crore as compared to Rs.757.1 Crore in Q4FY08 a increase of 7% (y-o-y). Key triggers for banks are Other Income was higher on back of strong fee income growth (up 103% y-o-y) and trading gains (up ~273% y-o-y). Operating Performance was slightly worse than expectations on account of higher operating expenses, which increased 23.5% q-o-q on account of higher wage costs and a non recurring investment to migrate all bank branches to the core banking system, decline of Net Interest Margin, and higher cost on account of branch expansion and branding. Net Interest Margin had significantly decline from 3.38% in Q3FY09 to 2.98% in Q4FY09.

Key Developments
• Interest Earned increased 3% q-o-q to Rs 4493.1 crore on account of at 6% qo- q growth in loan book

• CASA ratio declined 120 bps q-o-q to 30.5% as deposit mobilization campaign in December 2008 brought in mostly Fixed Deposits

• Capitalization remains comfortable with Tier I capital ratio at 13.0%, giving room for balance sheet expansion and additional fund raising

• Management is planning aggressive channel expansion of ~150 branches and ~500 ATMs in FY10

• Majority of bank’s advances are concentrated in the corporate sector (~48%) with the rest coming from SME (22%); agriculture (14%) and retail (15%). Management expects a similar profile of advances to be maintained in FY10

• Management expects incremental credit demand to come from the infrastructure (power, roads and telecom) and services (hotel and hospitals) sector

• Management indicates that it has been able to deploy resources towards advances and investments while parking minimal amount of funds with the RBI through reverse repo

Healthy Business Growth

The total business has grown by 26% to Rs. 3,34,440 crore in Q4FY09 as compared to Rs.2,64,804 Crore during Q4FY08. Advances have grown by 26% to Rs.1,44,732 crore in Q4FY09 as compared to Rs.1,14,793 Crore during Q4FY08 and deposits grew by 26% to Rs.1,89,708 Crore in Q4FY09 as compared to Rs.1,50,012 Crore during Q4FY08. Advances grew on the back of strong retail loan book which now constitute 79% of the banks advances while deposits grew on the back of huge demand for Term Deposits which stood at Rs.1,59,487 Crore in Q4FY09 as compared to Rs. 1,26,010 Crore in Q4FY08.

Valuations

• At current price of Rs 324 the stock is trading at 1.14x FY10E BV of Rs. 465 and 4.62x FY10E EPS of Rs. 70.

• We believe that Bank of India has low valuations (~1.2 FY10E BV/s) compared to public sector banking peers, moderating business growth (~18- 20% advances growth expected in FY10) will be positive as it will allow management to focus on asset quality and improving funding mix, stabilizing NIMs ~3% as high cost differential interest rate deposits run off or are repriced in next two quarters and CASA ratio of 35% is achieved in H2FY10, asset quality headwinds will likely subside as economy improves

• We recommend a “BUY” on the stock with a 12 month target price of Rs. 465 giving an upside potential of 43% from current level.

To see full report: BANK OF INDIA