We upgrade Bank of India to ‘buy’ with a revised target price of R330 a share, valuing it at 0.7x September 15e P/BV (from 0.4x March 15), still a 30% discount to Bank of Baroda (BoB).
Bank of India’s Q4 was a disappointing, especially on the asset quality front. However, its total stressed assets of 6.8% of loans is less than most of its peers (BoB: 8.6% and SBI: 9.1%). Moreover, as a 6.5% annualised stress creation in Q4 is close to the peaks of 7% seen in Q4FY13 for most of its large PSU peers, we expect stress to reduce ahead as the economy improves gradually.
Bank of India’s other key challenge is capital. However, it has prudently cut dividends. It now has the lowest payout ratio among peers and is in talks to raise fresh capital from public sector insurance companies. Its valuations are, however, at a 30-50% discount to BoB and Punjab National Bank, which should reduce ahead.
Bank of India’s Q4 profit was down 26% y-o-y at R560 crore, well below our estimates. Elevated credit costs (160 bps) and high operating expenses (+31% y-o-y) were key drags on earnings. Asset quality remains under stress. Fresh impaired asset creation was high at 6.5% annualised in Q4.
While the management indicated that a part of the slippages will be classified as restructured in Q1FY15, it still remains stressed. Loan growth remains aggressive, led by corporate loans (+11% q-o-q) but more towards PSUs. The management guides to a moderated 18-20% loan growth in FY15e. BoI’s capital adequacy remains quite low with Tier 1 (Basel 3) at 7.2%.
IDFC Institutional Securities