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Research
Bank of India - Operating performance to improve; risk-reward good - Religare
Posted On : 2012-12-20 20:28:55( TIMEZONE : IST )
BOI's management, in our recent interaction, seemed confident on asset quality and improvement in operating performance in H2FY13. The bank is guiding for a sharp improvement in slippages and reduction in GNPLs in H2FY13. NIMs are also likely to improve from the low levels of 2.2%-2.4%, aided by improvement in slippages and C/D ratio. At current valuation of 0.8x FY14E BV, the stock is trading at a discount to peers, which will narrow on asset quality improvement. Upgrade to BUY; revised Mar'14 TP Rs 400.
- Slippages likely to have peaked: BOI's asset quality has remained volatile in the past 2-3 years, resulting in a de-rating of the stock. Slippages were high in H1FY13 at Rs 44.8bn (4.2% on an annualised basis); consequently, GNPLs/NNPLs rose from Rs 58.9bn/Rs 36.6bn (2.34%/1.5%) in Mar'12 to Rs 89bn/Rs 52bn (3.42% /2.04%) in Sep'12. However, incremental slippages in H2FY13 are likely to improve significantly. Recoveries have also remained healthy; hence GNPLs are likely to decline. Restructuring could remain high (H1FY13 restructuring at Rs 46bn).
- NIMs likely to improve: BOI's NIMs (down to ~2.3% in H1FY13 from 2.9% in FY11) have remained under pressure due to strain on asset quality. However, NIMs are likely to improve with lower slippages. Domestic C/D ratio is also low at 67% and improvement in C/D ratio would support NIMs.
- Credit growth to pick up in Q4FY13: Overall advances have grown by only 2% in H1FY13, whereas deposits have grown by 4.5%. However, the management expects advances to pick up in Q4FY13.
- Improvement in asset quality and macro outlook key catalysts; upgrade to BUY: BOI is currently trading at a 32% discount to its five year average P/one-year forward BV of 1.2x. At current valuations, the stock is also trading at a discount to large nationalised banks. Risk-reward is favourable in our view given likely improvement in asset quality, peaking of rates and likely pick-up in growth in FY14.
