Bank of India - Asset quality malaise just doesn't seem to disappear; maintain Reduce - BRICS

BOI ensured that the market's focus does not shift from its asset quality issues by reporting very weak Q2FY13 results, with PAT declining 11% yoy and 66% qoq and coming in 60% below our estimate. Gross slippages remained at the Q1FY12 level (slippage ratio: 5.2%), while recoveries/upgrades were also lower. A substantial portion of BOI's slippages came from the large and mid-corporate segments and management expects pressure on asset quality to persist over the next 3-4 quarters. Absolute GNPA was up 36% yoy. Total provisioning rose 34.5% yoy (up 3.3x qoq). Incidentally, BOI witnessed a qoq decline in the share of retail assets, which was supposed to be a thrust area for the bank, while there was an increase in the share of corporate loans (including SME). We lower estimates, reduce target price further to Rs260 (from Rs275 earlier) and retain Reduce rating on the stock.

What to do with the stock: The stock trades at1.1x forward book (conservatively adjusted for NPAs from restructured book) for an average RoE of14.5%. However, BOI's asset quality still remains weak as well as volatile/lumpy and makes the task of drawing an earnings trend that much tougher. Moreover, weak economic growth, coupled with the Finance Ministry's directive (to PSU banks) to reduce their dependence on bulk deposits, will curtail balance sheet financing and result in a much slower loan growth. Further, BOI (and other PSU banks) are likely to face operational efficiency headwinds as they go in for bipartite wage hike discussions towards the end of 2012 (not factored into our current estimates). Under these circumstances, we find it best to stick to private sector banks and at best, BOB and SBIN, among PSU banks.

Valuation - cheap, but no value comfort: The stock trades at 1.12x forward book (conservatively adjusted for NPAs from restructured book). We value the stock at 1.04x forward book and 4.0x 12-month forward earnings. Given the multiple headwinds to earnings and negligible visibility on the earnings trajectory, we retain our rating of Reduce on BOI, with a downward revision to our target price to Rs260 from Rs275 earlier.

Source : Equity Bulls

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