>BANK OF INDIA (MORGAN STANLEY)

19% ROE; 1.2x Book; 7x Earnings – Top Pick in India

BOI has been the best performing bank in our coverage over the past 3-5 years: This has been driven by continuously improving profitability – in F2009, BOI generated higher ROA than private banks in India did. We expect BOI to keep reporting strong profitability (18-19% ROE in F2010e), allowing its multiples to continue rerating. Our new 1-year target price implies valuation of 9x forward earnings and 5x pre provision.

The bank has been strongest in organic book generation: Excluding capital raisings and property revaluations, BOI has more than doubled its book value in the past four years, exceeding most Indian banks (including private), thanks to its strength in profitability. Unlike other banks that have relied on trading gains to drive earnings, BOI has increased its core profits at a 33% compound annual rate over this period. BOI has also been aggressively providing higher coverage on NPL's – its NPL coverage ratio is 75%.

We expect profitability to remain strong: We are building in 15% volume growth (vs. management guidance of 20-25%) and 25 bps in NIM compression for the year. We have also taken up provisions to about 75 bps of loans. We assume lower capital gains and recoveries compared with last year – and still end up with a 19% ROE forecast. There are not too many
financials in Asia with such high ROE prospects this year. In that context, we think the stock can rerate meaningfully from the current 7x earnings.

Top pick in Indian financials; revised price target implies 35% return from current level: We derive our new target of Rs475 from a probability-weighted analysis of our Bull-, Bear-, and Base-Case scenarios. Even our Base-Case fair value represents about 28% upside from the current level.

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