Bank of India - Asset quality concerns refuse to die - Centrum

BoI's Q2FY13 core performance came largely in line though bottom-line performance was well below our expectations led by a spike in provisions as asset quality worsened further. Slippages jumped to ~7% which in turn pushed provisioning cost to 240bps. We maintain Neutral rating on the stock with a revised target price of Rs275 as we expect the stock to underperform the sector and broader markets due to the overhang of asset quality in a difficult operating milieu.

- NIM expands by 10bps QoQ: The in line NII performance (up 15% YoY) was driven by a 10bps QoQ expansion in NIM along with a strong 21% advances growth YoY. NIM expansion was primarily due to 20 bps better loan yields QoQ (absence of interest income reversal), which was partly offset by 10bps higher cost of funds. While the NIM can improve, big-ticket restructuring or slippages remain a key risk. We retain our conservative NIM assumptions (10 bps contraction over an already weak NIM in FY12).

- Asset quality: no respite in sight: Asset quality trends remained volatile as most matrices deteriorated further. %GNPA inched up by ~85bps QoQ to 3.4%, slippage rate jumped to 7%, and restructured assets were up 4% to 6% 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 that economic activity is weak.

- Aggressive credit growth: Loan growth came in at 21% YoY (helped by rupee depreciation), with domestic advances book expanding by a relatively lower 16% YoY. Within domestic segments, the growth was driven by retail (24% YoY) and SME (25% YoY) segments. It should be noted that SME portfolio growth has rebounded after more than a year of muted growth. Given the weak capital position and worsening asset quality profile, advances growth is expected to moderate during FY13 to ~17%.

- Weak non-Interest income: Non-interest income at Rs8.94bn, up 6% YoY, was disappointing considering that CEB contracted by 12% YoY. Importantly, the positive growth was due to strong recoveries (up 90% YoY) and healthy forex related income (up 24% YoY). Given our view that the bank would be forced to moderate its loan growth, we expect the core fee income stream to remain muted in the near term.

- Underperformance to continue as asset quality overhang remains: As we had highlighted earlier, the stock is likely to continue to underperform industry indices given the asset quality overhang. We are lowering our earnings estimates further as we tighten our asset quality assumption. At the current market price of Rs280, the stock trades at 5.6x FY2014E EPS and 0.9x FY2014E ABVPS. Our revised fair value estimate of Rs275 is based on valuation of 0.9x FY14E ABVPS given anticipated weak RoE profile in FY13 and FY14. We remain neutral on the stock given the overhang of asset quality concerns and significant challenges to expansion in return ratios.

Source : Equity Bulls

Keywords