Reduce Bank of India; target Rs 240: Emkay

Emkay Global Financial Services has recommended reduce rating on Bank of India (BOI) with a target price of Rs 240 in its October 29, 2012 research report.

"BOI Q2FY13 PAT at Rs3bn way below estimates despite zero tax, driven by sharp rise in NPAs/provisions even as NII at Rs22bn inline. NPA provisions rise 1.5-times over Q1FY13. 15% NII growth largely driven by 15bps qoq expansion in Global NIM’s to 2.4% helped by 28bps expansion in domestic NIM’s, even as overseas NIM’s contracted by 23bps qoq. Asset quality deteriorated further with Rs27.3bn of slippages and Rs8bn of restructuring. With higher provisioning on incremental slippages, PCR improved to 41.2% from 34.6%. Cut our earnings by 7/10% and ABV by 10% each for FY13/14E. Pressure on tier I rises with NNPA/Net worth ratio up further to 24%.

Net NPL / networth ratio for the bank after easing to 17.4% in the March 2012 went up to 23.4% now. BOI’s core tier I equity is also low at ~7.5%. We believe that the bank would have to seek significant capital of upto Rs25-30bn for pushing up the capital ratios. BOI’s tax provisions for the quarter were virtually zero. The management guided that the lower tax rate was on account of two reasons: (1) tax breaks on some classes of domestic loans and (2) provisions done in prior period on some of domestic NPAs which now they have classified as international NPAs. While we are wary of the treatment of NPAs, BOI is confident of these tax breaks.

BOI continues to disappoint us on numbers on both P&L and Balance sheet front. Slowing advance growth, lack of improvement in NIMs (despite being low) and higher slippages have been areas of concern for long. While the bank provided some relief by arresting slippages and improving upon margins in H2FY12, it again fumbled badly during H1FY13. As we have argued earlier, key negatives for the stock are: a) still high Net NPLs / net worth ratio (23%) and b) Stressed asset book at 11.8% of advances and c) suboptimal RoAs at 0.6-0.7% driven by higher credit costs (1.3% in FY13/14E vs 0.88% in FY12). We have cut our earnings by 7/10% and ABV by 10% each for FY13/14E. Maintain REDUCE with a target price of Rs 240," says Emkay Global Financial Services research report.

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