Bank of India - Weak core performance - Centrum

Despite an in-line bottomline, BoI's Q1FY13 core performance came in well below our expectations led by a sharp contraction in NIM (interest reversal) QoQ. Asset quality trends continued to remain volatile with slippage rate jumping back to 2.6%, GNPA up 22bps QoQ, restructured assets up ~25% QoQ to ~8% of loans and PCR down to 61%. Given the continued volatility in asset quality matrices and difficult operating environment ahead, we see stiff challenges to expansion in return ratios leading us to turn neutral on the stock.

- NIM contracts by 60bps QoQ: The disappointing NII performance (down 18% QoQ) was driven by a 60bps QoQ contraction in NIM even as advances grew by a healthy 23% YoY. NIM contracted sharply by ~50bps in blended yields (led by interest reversal on NPAs & restructured assets) while the cost of funds inched up marginally by 10bps QoQ. While the NIM can bounce back, bigticket restructuring or slippages remain a key risk. We have lowered our NIM assumptions and now expect a flattish trend YoY during FY13 (despite FY12 NIM level already low at 2.45%).

- Asset quality: no respite in sight: Asset quality trends remained volatile as most matrices deteriorated after improving during Q4FY12. %GNPA inched up by ~22bps QoQ to 2.56%, slippage rate jumped to 2.6%, provisioning cover eroded by 330bps QoQ to 61% and restructured assets were up ~25% to 7.8% of loans. We maintain our view that the restructured assets are likely to rise further in quarters ahead, though the quantum may be lesser. Overall, risks to asset quality remain given weaker monsoon so far and rising risk of agri loan waivers.

- Aggressive credit growth: Loan growth came in at 23% YoY and 6% QoQ (helped by rupee depreciation), with domestic advances book expanding by a relatively lower 14% YoY. Within domestic segments, the growth continues to be driven by retail (45% YoY) and corporate (19% YoY) segments. Meanwhile, SME portfolio was down 9% YoY. Given the weak capital position, advances growth is expected to moderate during FY13 to ~17%.

- Strong recoveries supported non-Interest income: Non-interest income at Rs8.4bn, up 27.4% YoY was a positive surprise. Importantly, the strong growth was led by strong recoveries while CEB growth was muted at 10.7% YoY. The management continues to expect strong recoveries in FY13 as well, though we believe that could be difficult considering difficult operating environment.

- Underperformance to continue as asset quality overhang remains: We are lowering our earnings estimates further (FY13 by 6.3% and FY14 by 12.3%) as we factor in stiffer credit costs (100bps) and lower net interest margin. At current market price of Rs291, the stock trades at 4.8x FY2014E EPS and 0.9x FY2014E ABVPS. Our revised fair value estimate of Rs330 is based on valuation of 1.0x FY14E ABVPS. We are neutral on the stock given the overhang of asset quality concerns and significant challenges to expansion in return ratios.

Source : Equity Bulls

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