[T.S.R:16130] Bank Of India-Sell

Profit up 91%. Bank of India reported 91% yoy growth in net profit, led by better productivity and lower NPA provisions. We retain Sell as we expect the slow business growth, modest core earnings and high NPA provisions to restrain RoE.     n       Steady business growth; CASA improves. Business growth of 22% yoy was led by improving growth in credit (up 22.7%) and deposits (21.3%). NIM rose 24bps yoy, but fell 9bps qoq, to 2.81%. CASA share rose 136bp yoy to 33.5%, yet remains one of the lowest among large PSU banks. Modest credit growth and low CASA share are likely to keep NIM under pressure. n       Asset quality weakens; slippages still high. Gross NPAs rose 1.6% qoq. NPA coverage, including technical write-offs, is 70%, meeting RBI's requirement. However, slippages have increased qoq, from 1.4% to 1.9% of loans. So far, 18% of restructured loans have turned NPAs. Given that a high 4.7% (`86bn, 55% of equity) are restructured loans and that we expect some would default, we estimate credit costs in FY11 to be high. n       RoE to recover, but lower than historical highs. Shift of management focus from aggressive growth to profitability could drive RoE, led by a marginally better NIM and normalised credit costs. Yet, BoI's RoE is unlikely to touch its past six-year average of 21%. Hence, future valuations could be capped. n        Valuation. At our target price, BoI would trade at 1.5x FY11e and 1.2x FY12e ABV. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.

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