Maintain BUY on Bank of India - Pressure on Asset Quality to Ease, NIMs Set to Improve - Karvy

Bank of India (BoI) is currently trading at 20% discount to its five year average valuation. Stock has underperformed the Bankex by 13% over last one year reflecting pressure on asset quality. However, with the expected improvement in macro conditions, such huge discount to its peers and to its own average valuation seems to be unjustified.

Pressure on Asset Quality to Ease: After witnessing improving trend in H2FY12, Bank of India's asset quality has shown stress in H1FY13. As per our recent interaction with BoI's Management coupled with expected improvement in economy and likely cut in interest rates, we believe that the pressure on asset quality would ease from now onwards. Unlike its peers, Bank of India has relatively lesser exposure to relatively vulnerable sectors i.e. infrastructure, metals, mining and textiles etc.

NIMs - Set to Improve: Bank of India's NIMs suffered by over 50 bps over last three years. We expect the Bank's NIMs to improve from now onwards backed by lower proportion of high cost deposits, stable CASA and interest recognized on recovered NPAs.

RoE Expansion - To Drive Valuation: Bank of India's average RoE for FY10-12 has declined to 14.2% as against 23.3% for FY07-09 on account of compression in NIMs and rise in credit cost. We expect the Bank's RoE would improve to 18.2%, would lead to improvement in valuations.

Outlook & Valuation

At the CMP, the stock trades at 4.8x & 4.2x FY13E & FY14E earnings, and at 1.0x & 0.8x P/ABV FY14E & FY15E, respectively. Based on 20% discount to its historical mean valuation implying 1.0x P/ABV FY15E, we reiterate our "BUY" recommendation on Bank of India with upwardly revised target price of Rs. 465 per share (from Rs. 395 earlier).

Source : Equity Bulls

Keywords