[Investors Please Listen] Bank of India: Disappointing performance: Recommendation: Hold Price target: Rs397 Current market price: Rs319

Cluster: Apple Green

Result highlights

• Bank of India (BoI)'s operating performance in Q1FY2010 was disappointing. This was on account of a lower than expected top line growth, margin contraction and evident stress on asset quality during the quarter. The bank reported a net profit of Rs584.3 crore for Q1FY2010, indicating a muted growth of 4.0% year on year (yoy) despite robust treasury gains. 
• Despite a healthy 20.3% year-on-year (y-o-y) growth in the advances, the net interest income (NII) grew by just 10.1% yoy to Rs1,300.6 crore, as the reported net interest margin (NIM) contracted by 47 basis points yoy and by 56 basis points sequentially. The contraction in the NIM stemmed from a 41-basis-point sequential decline in the yield on advances, which outweighed a 27-basis-point quarter-on-quarter (q-o-q) reduction in the reported cost of funds.
• The non-interest income grew moderately by 14% yoy to Rs645.9 crore. The sharp decline in the recoveries and the foreign exchange (forex) related income partially offset the spike in the treasury gains (up 253% yoy) during the quarter. 
• The provisions decreased by 36% yoy, as the bank reversed Rs128 crore of marked-to-market (MTM) provisions made earlier. However, this decline was partially offset by the 23.6% y-o-y increase in the non-performing asset (NPA) provisions and Rs173 crore other provisions mainly pertaining to restructured assets (Rs120 crore). 
• The asset quality of the bank continued to deteriorate for the third consecutive quarter. The gross NPA (GNPA) increased by a significant 38.2% yoy and by 12.8% quarter on quarter (qoq) to Rs2,787.6 crore. On a relative basis, the percentage of GNPA (% GNPA) increased by 18 basis points qoq to 1.89%. The provision coverage declined to just 55.7% from 74.6% in Q4FY2009. However, the incremental GNPAs during the quarter include one large corporate account (Rs220 crore), which is likely to get upgraded in the current quarter as indicated by the management.
• During the quarter the bank restructured loans worth Rs1,600 crore, which is lower compared with Rs1,900 crore worth applications pending as on March 31, 2009. This along with assets worth Rs5,048.7 crore restructured as on March 31, 2009 constitutes around 4.5% of the total outstanding loans as on June 30, 2009. 
• The advances witnessed a healthy growth of 20.3% yoy (above the industry growth) to Rs147,810 crore on the back of a robust 36.1% y-o-y growth in the corporate segment. Meanwhile, the global deposits grew by a healthy 22.5% yoy to Rs195,021 crore. Importantly, the current account and savings account (CASA) ratio was largely stable at 30.9% after witnessing a continuous decline in the recent quarters. 
• The capital adequacy ratio (CAR; as per Basel II norms) as on June 30, 2009 stood comfortable at 13.26% though. The tier-I capital adequacy remains comfortable at 9.19%, providing the bank with enough headroom to raise tier-II capital.
• We have reviewed our assumptions and fine-tuned our earnings estimates for FY2010 and FY2011 after the Q1FY2010 results of the bank. The bank's Q1FY2010 performance was disappointing in terms of the significant margin contraction, slower growth in credit and core fee income, and higher delinquencies during the quarter. Though the management remains optimistic about improvement in bank's operating performance from hereon, we believe the trend in the asset quality and margins will remain the key monitorable in the quarters to come. At the current market price of Rs319, BoI trades at 5.0x FY2011E earnings per share (EPS), 2.5x FY2011E pre-provisioning profit (PPP) per share and 1.2x FY2011E adjusted book value (ABV) per share. We maintain our Hold recommendation and price target (Rs397) on the stock.

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