Bank of India - Asset quality remains weak; maintain Reduce - BRICS

BOI reported a lower than expected growth of 12% yoy in PAT, aided by higher recoveries from written-off assets and a lower tax rate. While slippages were lower than expectation, a much higher write-off led to lower net NPA ratio. The devil, however, was in restructured assets, with BOI restructuring an additional Rs22bn of assets in the quarter. Gross slippage ratio from restructured assets in the last 12 months aggregated to nearly 60%, leaving us with no comfort and visibility on the asset quality front. We retain Reduce rating, but revise target price to Rs340.

Change in estimates: We expect BOI to maintain NIM in the range of 2.40-2.50% and good treasury profits. We cut our FY13/14 EPS estimates by 1.4% and 0.8% to Rs51.4 and Rs70.5, but maintain our FY15 EPS estimate at Rs79.9, mainly to factor in higher operating expenses.

Valuation uncomfortable: The stock trades at 1.3x forward book (conservatively adjusted for NPAs from restructured book). We value the stock at 1.22x forward book and 5.11x 12-month forward earnings. Given the multiple headwinds to earnings and negligible visibility on earnings trajectory, we retain our rating of Reduce on BOI, with an upward revision to our target price to Rs340 from Rs330 earlier. Under these circumstances, we find it best to stick to private sector banks and at best, BOB, among PSU banks.

Source : Equity Bulls

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