bank of india

Alpesh Mehta ([email protected]) +9122 39825415/ Abhishek Agarwal ([email protected]) +9122 39825414

Bank of India

3QFY11 Results UpdateSECTOR: BANKING

Rs461 NeutralBSE SENSEX S&P CNX19,008 5,697Bloomberg BOI IN

Equity Shares (m) 525.9

52-Week Range (Rs) 588/309

1,6,12 Rel.Perf.(%) 9/9/9

M.Cap. (Rs b) 242.4

M.Cap. (US$ b) 5.3

Bank of India's 3QFY11 PAT grew 61% YoY (on a low base) to Rs6.5b (6% lower than our estimate of Rs7b). NII growthof 33% YoY and 12% QoQ surprised us positively (8% higher than our estimate, led by a 28bp QoQ and 49bp YoYexpansion in global NIM). However, accelerated provisions for the second pension option of Rs2.3b, provisions for CLNnote (Lehman Brothers was a counter party) of Rs2.02b and other provisions of Rs1b led to lower than estimated PAT.Adjusted for accelerated employee provisions and other provisions PAT was Rs10.2b (cal). Key highlights are: Domestic NIMs improved 32bp QoQ to 3.5% led by a 4bp QoQ decline in cost of deposits and improvement in yield

on assets. NII grew 33% YoY and 12% QoQ to Rs19.9b (8% higher than our estimate of Rs18.4b). In 2QFY11,interest income reversal was Rs700m on fresh NPAs.

Loans grew ~5% QoQ and ~23% YoY to Rs1.92t and deposits grew ~5% QoQ and ~23% YoY to Rs2.52t. The globalCD ratio was ~76% but the domestic CD ratio remained lower at ~71%. The infrastructure sector grew over 50% YoY.

Gross NPAs and Net NPAs in absolute terms declined 7% and 20% QoQ to Rs45.4b and Rs16.6b respectively. In3QFY11 one large aviation account worth ~Rs5b was upgraded, but the bank has not reversed provisions made forthis to boost coverage ratio. Slippages in 3QFY11 were Rs4.8b against Rs8.2b a quarter earlier. Annualized slippageratio was 1.1% for 3QFY11 against ~1.7% in 1HFY11 and 2.9% in FY10. Provision coverage ratio including technicalwrite offs were 74.5% against ~70% a quarter earlier.

The bank has not yet ascertained pension deficit for the second pension option and gratuity but has started makingprovisions considering the liability of Rs40b (to be amortized over five years). In 1HFY11 the bank had made aprovision of Rs900m each quarter and held Rs1.6b of additional provisions. In 3QFY11, apart from normal a quarterlyrun rate provision of Rs900m, it made accelerated provision of Rs2.3b during the quarter. This, overall provision madeso far is ~Rs6.5b.

The stock trades at a P/E of 7.2x FY12E EPS and P/BV of 1.4x FY12E BV. We have a Neutral rating.

Bank of India

22 January 2011 2

Global margins up 28bp QoQGlobal margins improved 28bp QoQ and 49bp YoY led by contained cost of deposits andimprovement in yield on assets. Domestic margins improved 32bp QoQ and 38bp YoY to3.49%. Domestic cost of deposits declined 4bp QoQ to 5.61%, a positive surprise as theindustry witnessed a 15-40bp QoQ increase in cost of deposits.

Yields on loans (domestic) improved 31bp QoQ to 10.35% (led by a hike in PLR and thebase rate). Yield on investment (domestic at 7.93% and global at 7.71%) remains elevatedand it is one of the highest in the industry. Due to higher deposit re-pricing over 2-3quarters margins are expected to decline in 2-3 quarters from current levels.

Trends in yields, costs and margin (%)3QFY11 2QFY11 3QFY10

Global Domestic Foreign Global Domestic Foreign Global Domestic ForeignYield on loans 8.78 10.35 3.05 8.47 10.04 3.09 8.41 9.91 3.00Cost of deposits 4.97 5.61 1.28 4.99 5.65 1.30 5.26 5.90 1.58NIMs 3.09 3.49 1.45 2.81 3.17 1.37 2.60 3.11 0.82

Source: Company/MOSL

Bank of India

22 January 2011 3

Business growth over 20%, CASA ratio down ~100bp QoQGlobal and domestic loans grew by ~5% QoQ and ~23% YoY to Rs1.93t (domestic loansat Rs1.51t). Strong growth in corporate loans drove overall loan growth. Corporate loansgrew ~5% QoQ and ~47% YoY to Rs867b, led by over 50% growth in the infrastructuresegment. Retail loans were flat QoQ and YoY. Global and domestic deposits grew by~5% QoQ and ~23% YoY to Rs2.53t (domestic deposits at Rs2.15t).

The global CD ratio was stable at ~76% QoQ whereas domestic CD ratio remains low at~71%. Reported CASA ratio declined by 100bp to 32.5% from 33.5%. CA deposits declined2% QoQ (up 8% YoY) and SA deposits grew by 3% QoQ and 26% YoY.

Higher upgrading, lower slippages lead to positive surprise on asset quality,GNPA down 7% QoQGross and net NPAs in absolute amounts declined 7% and 20% QoQ to Rs45.4b andRs16.6b respectively. Provision coverage ratio, including technical write-offs, was 74.5%against ~70% a quarter earlier. GNPA and NNPA declined by 28bp and 26bp QoQ to2.36% and 0.88% respectively. In 3QFY11 one large aviation account worth Rs5b wasupgraded but the bank has not reversed provisions made for the same to boost coverageratio.

Overall upgradations in 3QFY11 was (Rs6.1b v/s Rs1.2b a quarter earlier) and recoverieswere Rs2.1b against Rs1.9b a quarter earlier. Write offs were negligible during the quarterand slippages were Rs4.8b v/s Rs8.2b a quarter earlier. 3QFY11 annualised slippage ratiowas 1.1% against ~1.7% in 1HFY11 and 2.9% in FY10. We model slippage ratio of 1.6%(v/s 1.8% earlier for FY11 and 1.7% for FY12). We model credit cost of 50bp in FY11and FY12.

Trading profits declineNon-interest income grew 11% QoQ and 13% YoY. Treasury gains declined sharply toRs549m against Rs1.37b in 3QFY10. Recoveries in 3QFY11 were Rs658m against Rs301min 2QFY11 and Rs332m in 3QFY10. Fee income grew 21% YoY and was sequentiallyflat. Forex income was Rs1.3b (against Rs1.3b in 2QFY11 and Rs758m a year earlier).

Valuation and viewAsset quality, which has remained volatile so far in FY11, is a key factor for earningtraction. In FY10, higher slippages kept NIMs subdued and resulted in higher credit costs.While asset quality, margins and core operations are positive surprises during the quarter,sustainability is a key question considering the high volatility.

We maintain our earnings estimates as better than estimated asset quality performanceand margins are being offset by higher provisions and opex. We expect BoI to post EPS ofRs51 in FY11, Rs64 in FY12 and Rs79 in FY13 and BV will be Rs284 in FY11E, Rs335 inFY12E and Rs398 in FY13E. The stock trades at a P/E of 7.2x FY12E EPS, 5.8x FY13EEPS and P/BV of 1.4x FY12E BV and 1.2x FY13E BV. We have a Neutral rating.

Bank of India

22 January 2011 4

Deposit growthtracks loan growth

Trend in loans

CA deposits declined2% QoQ (up 8% YoY)

and SA deposits grew by3% QoQ (up 26% YoY)

Loan growth in linewith the industry

Deposit trends

Trend in CD ratio (%)

CASA ratio declines sequentially (%)


Global CD ratiosequentially stable

1,76

8

1,84

4

1,92

8

1,22

9

1,29

3

1,36

1

1,44

7

1,71

3

1,57

0

1,50

2

1,47

8

38.835.0

31.326.1

20.316.2 15.3

18.4 19.622.7 22.8

1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11

Loan (Rs b) Loan Grow th (%)

2,33

7

2,41

1

2,52

5

1,95

0

1,98

7

2,06

0

2,29

8

1,89

7

1,71

7

1,64

2

1,59

2

19.821.120.021.022.5

26.5

30.126.7 26.4

21.322.6


Deposits (Rs b) Deposits Grow th (%)

75.776.5 76.3

77.278.7 79.3

76.374.6

76.275.675.8


3.0

4.4

3.53.9

3.4 3.4 3.3

4.4

3.2

4.1 4.0


Bank of India

22 January 2011 5

Trend in fee income(Rs b)

Fee income grew by over20% YOY (Rs b)

Trend in treasury income(Rs b)

Treasury incomedeclines YoY

Trend in slippages (%)

Asset quality improves sequentially

Higher upgradations andlower slippages lead to

positive surprise onasset quality

Annualised slippage ratio of1.1% for 3QFY11 against

~1.7% in 1HFY11 and2.9% in FY10

0.70.2

4.4

2.2 2.4

1.5 1.4

0.71.0

0.40.6



3.0

4.4

3.53.9

3.4 3.4 3.3

4.4

3.2

4.1 4.0


3.0

5.2 5.6

2.9

5.9

14.1

6.5

15.0

6.28.2

4.8


1.6

1.5

1.6

1.7

2.7

2.6

2.4

1.1

0.9

2.9

1.9

2.7

2.6

0.5

0.5

0.5

0.4 0

.8 1.1

1.0 1.

3

1.2

63.457.568.8 69.3 68.4

74.667.6

59.1 61.9 54.8 57.0


GNPA (%) NNPA (%) PCR (%)

Bank of India

22 January 2011 6

Company backgroundBank of India is the third largest state-owned bank, with abalance sheet size of Rs2.75t. It has a pan-India presenceand more than 3,200 branches with an overseas networkextending to 28 branches/offices and accounting for ~18%of its business. All the branches are on a CBS platform.

Investment arguments Over past 18 months the bank suffered from high

slippages due to strong loan growth in the past. About19% of the restructured portfolio has slipped into theNPA category.

Business growth moderated in FY10 as the bank wascautious due to higher slippages

Lower loan growth is leading to pressure on fee income.Pressure on core operating income and higher opex(due to a wage revision) is leading to increase in coreC/I ratio.

Key investment risk Asset quality remains a key factor for earning traction

ahead which had remained volatile during FY11. InFY10, higher slippages kept NIMs subdued and resultedin higher credit costs.

Recent developments Bank of India raised the interest rate on retail term

deposits by 25-75bp in different maturity buckets inJanuary 2010.

In December 2010 it hiked its base rate by 50bp andPLR by 75bp to 9% and 13.25% respectively.

Valuation and view We expect BoI to post EPS of Rs64 in FY12 and BV

would be Rs335 in FY12. The stock trades at a P/E of7.2x FY12E EPS and P/BV of 1.4x FY12E BV. Wehave a Neutral rating.

Sector view Loan growth is strong but rising inflation and increasing

interest rates are near-term headwinds for the sector. Our economist expects the current tightness in liquidity

to begin to ease in 4QFY11, allaying the pressure of asignificant NIM compression.

We believe margins will compress gradually. With strongloan growth and a high CD ratio, there is strong pricingpower with banks.

Banks with high CASA deposits and a lower proportionof bulk deposits will be preferred bets.

Comparative valuationsBoI PNB BoB

P/E (x) FY11E 9.0 8.1 8.1FY12E 7.2 6.7 6.9

P/BV (x) FY11E 1.6 1.8 1.8FY12E 1.4 1.5 1.5

RoE (%) FY11E 19.5 24.1 24.4FY12E 20.6 24.2 23.5

RoA (%) FY11E 0.9 1.3 1.2FY12E 0.9 1.3 1.2

Shareholding Pattern (%)Dec-10 Sep-10 Dec-09

Promoter 64.5 64.5 64.5

Domestic Inst 12.2 13.3 11.2

Foreign 15.7 15.4 17.2

Others 7.6 6.8 7.2

Bank of India: an investment profile

Stock performance (1 year)

EPS: MOSL forecast v/s consensus (Rs)MOSL Consensus Variation

Forecast Forecast (%)FY11 51.4 50.2 2.4FY12 63.9 65.1 -1.9

Target Price and RecommendationCurrent Target Upside Reco.Price (Rs) Price (Rs) (%)

461 469 1.8 Neutral

240

330

420

510

600

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11

Bank of India Sensex - Rebased

Bank of India

22 January 2011 7

Financials and Valuation

Bank of India

22 January 2011 8

Financials and Valuation

Bank of India

22 January 2011 9

N O T E S

Bank of India

22 January 2011 10

This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Motilal OswalSecurities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solelyfor your information and should not be reproduced or redistributed to any other person in any form.

The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. MOSt orany of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in theinformation contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regardingany matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. Therecipients of this report should rely on their own investigations.

MOSt and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. To enhance transparency,MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.

Disclosure of Interest Statement Bank of India1. Analyst ownership of the stock No2. Group/Directors ownership of the stock No3. Broking relationship with company covered No4. Investment Banking relationship with company covered No

This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations to this statement as may be requiredfrom time to time. Nevertheless, MOSt is committed to providing independent and transparent recommendations to its clients, and would be happy to provideinformation in response to specific client queries.

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