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Jan 30, 2013, 05.56 PM IST | Source: Moneycontrol.com

Accumulate Bank of India; target Rs 380: P Lilladher

Prabhudas Lilladher is bullish on Bank of India (BOI) and has recommended accumulate rating on the stock with a target price of Rs 380 in its January 28, 2013 research report.

Prabhudas Lilladher is bullish on Bank of India (BOI) and has recommended accumulate rating on the stock with a target price of Rs 380 in its January 28, 2013 research report.

"BOI reported PAT of Rs 8.0bn, which was in line with our expectations, as lower tax made up for the PPOP miss. Asset quality improved, with slippages coming off QoQ but part of the gross NPA improvement was write-off led. Operating metrics remained weak, with margins coming off QoQ v/s an improvement expected and core fee continued to contract. ROAs have inched up to just 0.75% despite asset quality improvement and Q3FY13 highlights our concern that return ratios may continue to remain sub-optimal (ROA at ~85bps + ROEs <15.5%) and this will restrict any material multiple improvement (PT based on 1x FY14 book).

BOI's margins dipped ~5bps QoQ (adjusted for Rs 1.2bn of interest on IT refund) v/s ~15bps improvement expected as both the domestic/international dipped QoQ. International margin contraction of ~10bps was due to ~Rs 80bn of low margin short-term lending done which is expected to reverse in Q4FY13. The key negative surprise was ~5bps NIM contraction on the domestic business led by a surprising 30bps QoQ fall in lending yields. NIMs may marginally improve in Q4FY13 (domestic mix) but with impending rate cut cycle, margin performance will remain muted in FY14 as well.

Muted performance on most operating metrics: (1) Reported loan growth was strong but ~40% of the Rs 200bn QoQ accretion to the loan book was driven by low margin short-term loans (2) Core fee excl. forex has reported a ~9% YoY decline and reported growth of ~+10% YoY on non-interest income was led by recoveries (3) Wage revision provisions in Q3FY13 of Rs 220m was restricted to actual salaries only and impact on pensions will only be taken from Q4FY13.

Moderation in slippages to <2% (Rs 12bn) is a positive but gross NPA trend was not as rosy as reported as a large part of the improvement was driven by ~Rs 8bn of prudential write-offs. Slippages included one large steel account of Rs 5.5bn which was restructured ~2-3 years back. Fresh restructuring was also elevated at Rs 22bn (~40% textiles) though repayments (Rs 11-12bn) led to better net numbers. We retain Accumulate with PT of Rs 380/share," says Prabhudas Lilladher research report.

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