Bank of India - Other income and low opex drives profitability - Avendus

Rise in other income, sequential NIM expansion and decline in operating expenses led to c93% y‐o‐y growth in the net profit in the Mar12 quarter. Other income was driven by recovery from written‐off accounts. Domestic NIM expanded 43‐bp sequentially to 3.29%. Gross NPL and net NPL ratios declined for the second consecutive quarter up to 40‐bp sequentially. Restructured loans increased c31% q‐o‐q to INR179bn, 7.1% of the total loans. We raise our FY13f PAT forecast by up to 27% to factor in lower NPL provisions and operating expenses. We rollover the TP to Mar13 and raise it by 8% to INR455. The TP values BOI at 1.1x the one‐year forward adjusted book value. We upgrade the rating to Buy. Higher‐than‐estimated incremental NPL and NPL provisions are the key risks.

Other income and decline in operating expenses drive net profit

Other income growth of c17.5% y‐o‐y was largely driven by strong recovery in the written‐off accounts, amounting to INR1.9bn (107% y‐o‐y). Furthermore, operating expenses fell c24.5% to drive the c93% growth in the net profit. The 43‐bp q‐o‐q rise in domestic NIM to 3.29% was led by a 33‐bp rise in yield on domestic loans. Savings deposits growth continued to moderate at 13% y‐o‐y. However, CASA ratio (domestic) improved 60‐bp sequentially, mainly due to the moderation in term deposits growth. Domestic loan growth (7% y‐o‐y) continued to decelerate due to a slowdown in the corporate segment and rose 7.4% y‐o‐y, while retail (15% y‐o‐y) and agri (33% y‐o‐y) grew faster.

Strong recovery coupled with low slippage drives fall in NPL ratios

Gross NPL and net NPL ratios dropped sequentially by 40‐bp and 31‐bp to 2.34% and 1.47%, respectively. Slippages declined c27% q‐o‐q to INR3.8bn (0.6% of annualized loans). However, outstanding restructured loans increased sequentially by c31% to INR179bn. Restructured loans, as a percentage of gross loans, were 7.1% at the end of Mar12. We lower our assumption for incremental NPL up to 20‐bp and reduce the NPL provisions forecast for FY13f-FY14f. However, NPL ratios are forecast to rise in FY13f.

Raise net profit forecast up to 27% for FY13f-FY14f

We raise our FY13f-FY14f net profit forecast up to 27%, driven by lower NPL provisions and operating expenses. We have reduced our assumption for growth in the average pay per employee by up to 5% for the period. While we lower our assumption for incremental NPL by up to 20‐bp to 60‐bp, it remains above that in FY12. The NPL provision‐to‐asset is estimated at 49‐bp during FY13f-FY15f (above the last two years' average at 45‐bp).

TP values BOI at 1.1x one‐year forward P/B

Large improvement in the asset quality during the Mar12 quarter is likely to drive the near‐term outperformance. We rollover the TP to Mar13 and raise it to INR455. The TP values BOI at 1.1x the one‐year forward book value. We upgrade the rating to Buy. Higher‐than‐estimated incremental NPL due to large restructured loans and NPL provisions are key risks.

Source : Equity Bulls

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