Monday, June 21, 2010


Our recent interaction with the management of Bank of India BoI) has made us believe that the concerns over deterioration in asset quality are set to recede in the coming quarters. High levels of NPLs had been the key worry for the past few quarters. With stringent provisioning norms and strong recovery mechanism in place, the management has guided for limited accretion in NPL. Moreover, with renewed focus on increasing CASA proportion, improving margins, 400+ branch addition and diversification in loan portfolio, we see BoI entering the next league of growth. BUY

23% CAGR in loans; favorable business mix to boost margins
After a decent 18%yoy growth in loan book during FY10 and a healthy 22% CAGR over FY08-10, we expect BoI to now witness sturdy 23% CAGR in loan book over FY10-12E. Lending towards SME and corporate segment have been the key growth areas. With intention to address its limited exposure towards mid-corporate segment, the bank has now opened 28 branches to cater solely to the needs of this segment. Over 75% of total domestic deposits
excluding CASA deposits) are at interest rate of less than 8%. This is relatively lower as against ~88% of advances at interest rate of over 8%. Increasing proportion of CASA deposits, healthy loan growth and improved loan mix, in our view, would enable the bank
to report improvement in margins.

Concerns over asset quality to fade in coming quarters
GNPL for the bank at Rs48.8bn were up 98%yoy and constituted 2.9% of total loans. Net NPLs too, were up 2.5xyoy to Rs22.1bn 1.3% of total loans) largely on account of significant rise in
slippages. We expect high level of slippages to recede with improving health of the economy and recovery mechanism in place. With pace of accretion towards restructured loans having slowed down, we expect minimal loans to come up for restructuring.

Valuation gap with peers has widened, BUY
With sturdy 23% CAGR in loans over FY10-12E, we expect the bank to witness 21% CAGR in balance sheet. Returns ratios too are set to improve with average RoE at ~18-19% levels and RoA at 0.8% over the said period. With concerns over deterioration in asset quality to fade in coming quarters, the valuation gap is expected to narrow down. We recommend BUY and assign a multiple of 1.35x FY12 P/Bx marginally lower than its peers) to arrive at value of Rs392.

To read the full report: BOI