Bank of India - Pressures to Ease Further; Reiterate "BUY" - Karvy

Pressure on Asset Quality Eases: The average slippages on Bank of India (BoI) have eased significantly to 2.1% in last 4 quarters as against 3.5% 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, the Bank has relatively lesser exposure to perceivably vulnerable sectors i.e. infrastructure, metals, mining and textiles etc. Healthy provisioning has enabled over 200 bps improvement in the Bank's provision coverage to 63.3% in Q2FY14.

NIMs - Set to Improve: BoI's NIMs suffered by >60 bps over last four 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: The Bank's average RoE for FY10-13 has declined to 13.7% 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 16.8%, would lead to improvement in valuations.

Capital - Continues to Remain as an Issue: Even after accounting for equity infusion by Government of India, BoI's Tier-I capital is expected to remain below 8%, while lack of capital can be a roadblock to growth.

Outlook & Valuation

We reiterate our "BUY" recommendation on BoI with unrevised target price of Rs. 265 per share valuing it at 0.7x P/ABV FY15E.

Source : Equity Bulls

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