Bank of India - Q4FY12 Result update - Centrum

Strong core performance, Upgrade to Buy

- BoI's Q4FY12 performance came in well above our expectations led by strong core performance (NIM expanded 30bps QoQ, strong recoveries). Slippage rate eased materially to 60bps, which along with strong recoveries lowered to GNPA (7% QoQ or 40bps). However, restructured assets increased by ~30% QoQ and stood at 7.1% of loans led primarily by SEB restructuring. At 0.8x FY14E BPS, negatives seems largely priced in leading us to upgrade the stock to Buy with a revised target price of Rs425 (1.1x FY14 ABVPS).

- Smart uptick in NIM: The above expected NII performance (up 8% YoY, 21% QoQ) was driven by a 30bps QoQ expansion in NIM and a calibrated 17% loan book growth. The NIM improvement can be traced to a 35bps expansion in blended yields (led by higher lending yields) while the cost of funds remained flat sequentially. The bank continues to shed low yielding advances and has moderated pace of deposit mobilisation given a mere 66% CD ratio (domestic) for last four quarters. We believe that as the bank ramps up its CD ratio further and rebalances its asset side, the NIMs should be able to weather potential pressure arising from lending rate cuts.

- Asset quality improves, restructuring spikes: Asset quality trends improved during Q4FY12 as 1) %GNPA improved by ~40bps QoQ to 2.3% 2) slippage rate came off materially to ~o.6% and 3) provisioning cover expanded by 300 bps QoQ. On the other hand, restructured assets increased by 30% QoQ to Rs177.3 (7.1% of loan book) - one of the highest in the industry. Notably, the incremental restructuring primarily constitutes SEB exposures. We maintain our view that the restructured assets are likely to rise further in quarters ahead, though the quantum may be lesser.

- Calibrated credit growth: Loan growth came in at 17% YoY and 4% QoQ (helped by rupee depreciation), with domestic advances book expanding by a mere 8% YoY. Within domestic segments, the growth continues to be driven by Retail and Corporate segments. Given the calibrated approach towards credit growth, we expect 17.3% growth rate in loans during FY13 which along with ~18% deposit growth should imply a healthy deployment pace of ~78%.

- Strong recoveries supported non-Interest income: Non-interest income at Rs9.7bn, up 17.5% YoY - was a positive surprise. Importantly, the strong growth was led by doubling of recoveries QoQ. The management continues to expect strong recoveries in FY13 as well, though we believe that could be difficult considering difficult operating environment.

- Upgrade to Buy: We have tweaked our earnings estimates to factor in incremental trends and additional information, though we have maintained stiff credit costs (90bps) assumptions considering challenging operating environment. At current market price of Rs353, the stock trades at 5x FY2014E EPS and 0.8x FY2014E BVPS. Our revised fair value estimate of Rs425 implies a valuation of 1.1x FY14E ABVPS - justified level in view of potential improvement in return ratios. We upgrade the stock to Buy from Hold recommendation previously.

Source : Equity Bulls

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