Bank of India - On a Sweet Spot - Maintain BUY - Karvy

We met the management of Bank of India (BOI). Beside significant improvement expected in asset quality from H2FY14, management expects higher growth in balance sheet along with bounce back of NIMs

Asset quality pressures to ease

Management expects upgradation and recoveries to fully offset incremental slippages during FY14, keeping GNPA in absolute terms at similar levels. However, we have conservatively assumed GNPA to increase by 11% in FY14. Write-off was higher at Rs12.9bn during Q4FY13 to take higher tax benefit. With changes in tax laws, we expects write-off to ease significantly in FY14. Restructured book after adjusting for repayments amounts to Rs164bn which accounts for 5.7% of loan book. The Bank does not expect any major restructuring going ahead.

Credit growth at 18-20%

It expects higher credit growth of 18-20% as against 16% last year. It expects credit to be driven by retail and SME segment as against corporate and international segment last year. We have conservatively factored lower credit growth of 17% for FY14.

NIMs to improve

NIMs have compressed by 40bps over last 2 years to 2.4%, mainly on account of reversal of interest on NPA, FITL and sharp compression in international NIMs to 1.1%. With containment in bulk deposit to 7.1% of total deposit, improvement in CASA with easing in interest rates, lower slippages resulting in lower reversal of interest and reasonable bounce back of international NIMs, management expects improvement in NIMs going ahead. We have factored improvement of 20bps in NIMs over FY13-15E.

Wage provision to increase

It has provided Rs0.7bn for wage hike in FY13 post expiry of old wage agreement factoring in 13% wage hike. Management is likely to increase it to 15%, in line with other banks. For pension it has assumed salary escalation of 5% as against 4% last year. With few of the peers factoring salary escalation of 5.5-6% and IBA in discussion with banks to bring uniformity, pension provisions for the bank might increase going ahead.

View & Valuation

Management is confident of improving its capital adequacy through government funding as well as likely QIP in Q3FY14. At the CMP, the stock trades at 3.7x & 3.2x FY14E & FY15E earnings, and at 0.8x & 0.7x P/ABV FY14E & FY15E, respectively. We reiterate our "BUY" recommendation on Bank of India with target price of Rs. 400 per share based on P/ABV FY15E of 0.9x.

Source : Equity Bulls

Keywords