icicidirect - pick of the week
Bank of India (BANIND)
By Chirag J Shah
Company Background
Bank of India (BoI) is considered to be one of the more efficient
public sector. It is one of the banks in India having a strong international
presence. It was incorporated in 1906 and was nationalised in 1969 along with
13 other major banks. The bank came out with its maiden public issue in 1997.
In terms of business volumes, it occupies a premier position among nationalised
banks. It was the first Indian bank to open a branch outside the country.
Currently, it has 2,622 branches in India . During the past few years, it has
strengthened its information technology infrastructure, undertaken business
process re-engineering, net worked branches and computerized all its branches.
Its global business has grown to Rs 2,63,488 crore in FY08 from Rs 2,05,176
crore in FY07, a growth of 28% YOY.
Investment rationale
Business growth to remain robust with reasonable margins
The business (advances + deposits) of the bank grew by 34% to Rs
282,124 crores, with international business forming 19% of total and latter
also growing by 34% y-o-y. On an individual basis the advances and deposits for
Q1FY09 grew by 39% and 30% respectively on a y-o-y basis. The main drivers for
the growth in advances came in from the corporate and the SME segment which
grew by 55% and 30% respectively. We believe that going forward these will
remain the key drivers for loan growth. The bank also continues to maintain a
healthy CASA (34% in Q1FY09) franchise will augurs as a hedge for margins when
term deposits are in flavour. Going forward we believe that the company will
able to maintain healthy margins of 2.8%-2.9% over FY08-FY10E with proportion
of CASA at 33% levels.
Fee income to aid revenue growth
BOI has been consistently generating robust growth in the fee
income segment. For Q1FY09 the company reported a healthy 54% y-o-y jump in the
non core income, which we believe is commendable task. Going forward we believe
that the bank with the help of its good corporate and SME clientele and
international presence will able to garner reasonable amount of commission,
exchange and brokerage . We estimate a 20% CAGR in its non core income over
FY08-FY10E.
Fall in bond yields to augur well for the investment book
The steep rise in the G-sec yields at 9% levels has caused a lot of
banks, especially the PSBs to make provisions in the AFS category in their
investment portfolio. This had its impact on the stock prices of PSBs like BOI.
The bank saw a jump of 248% in its investment provisions for Q1FY09 as a result
of good amount of exposure (17% of the total investment book in Q1FY09) to the
AFS category. However, now, as yields have fallen, the MTM losses will revert
to MTM gains. This will add to the bottomline of the company.
Improving operating efficiency
BOI has one of the lowest cost to income ratios at 39% for Q1FY09
as compared to 50% a year earlier. These have contributed to a operating profit
jumping 58% y-o-y. The operating efficiency can also be inferred from business
per employee improved by 37% over Q1FY08 and business per branch improved by
216% over same period. The main reason for the fall in operating expenses was
modest rise of 10% in the employee expenses. Also almost all the branches of
the bank are technologically updated which will add to the operating
efficiencies of the bank. We believe that the bank will be able to maintain a
cost to income ratio of 38% over FY08-FY10E.
Risks
a.. Rising interest rates impacting cost of funds
With interest rates rising, cost of funds is going up continuously
putting pressure on NIMs also. If monetary tightening with high inflation
continues for a longer period, we may see margins declining further and a
credit slowdown, which can impact future profitability.
a.. Asset quality may be impacted if higher rates persist for
longer tenure
a.. International exposure may hurt
Nearly 20% of B/S assets are international which may be impacted in
overseas financial crisis, however till now management hasn't made any
disclosures of losses.
Quarter ended Year ended Rs. cr
year 2008/06 2007/06 var % 2008/03 2007/03 var %
Sales Income 3,548.32 2,727.26 30.11 12,355.22 9,180.33
34.58
Other Income 566.42 381.15 48.61 2,116.93 1,562.95 35.44
Expenditure 1,023.77 849.79 20.47 3,661.49 3,470.56 5.50
Interest 2,367.55 1,780.05 33.00 8,125.95 5,739.86 41.57
Gross Profit 1,072.43 677.81 58.22 3,701.21 2,394.99
54.54
Depreciation 0.00 0.00 0.00 0.00 0.00 0.00
Tax 161.47 163.37 -1.16 675.31 409.69 64.83
PAT 561.95 315.20 78.28 2,009.40 1,123.17 78.90
Equity 525.91 488.14 7.74 525.91 488.14 7.74
OPM (%) 71.15 68.84 2.31 70.36 62.20 8.16
GPM (%) 4.42 3.57 0.85 4.60 -0.33 4.93
NPM (%) 15.83 11.55 4.28 16.26 12.23 4.03
Key Financial Ratios
2007/03 2006/03 2005/03 2004/03 2003/03
EPS 23.04 14.39 6.98 20.69 17.46
CEPS 25.03 16.38 9.00 22.49 19.25
Book Value 168.06 117.89 99.03 88.21 78.69
Dividend/Share 3.50 3.40 2.00 3.00 3.00
OPM 13.71 10.35 6.66 21.21 17.90
RONW 19.26 14.52 7.90 29.53 29.36
Debt/Equity 20.86 19.46 18.33 18.51 19.20
Ratio 0.32 0.41 0.42 0.46 0.39
Interest Cover 1.33 1.27 1.19 1.49 1.40
Financials:
BOI delivered a 24% growth in NII to Rs.1181 crores from Rs.947
crore contributed by a 39% surge in advances and 30% jump in deposits. BOI's
global yields on advances of 9.15% for Q1FY09 was slightly lower than 9.39% in
Q1FY08 and on other side cost of funds has gone up from 5.02% to 5.13% in
Q1FY09, both putting negative pressure on NIMs making it fall from 2.96% to
2.89% during same period. The CASA (current account saving account) for the
bank for Q1FY09 declined to 34% Vs 36% as the hike in deposits rates made term
deposits attractive leaving CASA deposits growth at 21% y-o-y.
BOI has one of the lowest cost to income ratios at 39% for Q1FY09
as compared to 50% a year earlier. These have contributed to a operating profit
jumping 58% y-o-y. The operating efficiency can also be inferred from business
per employee improved by 37% over Q1FY08 and business per branch improved by
216% over same period. Also the bank witnessed a strong traction on the non
interest income front which grew by 49% from Rs. 381 crores in Q1FY08 to Rs.385
crores in Q1FY09. This was led by a robust growth in the
commission/exchange/brokerage (CEB) segment, which witnessed a growth of
53%y-o-y. Also the rise in Non interest income can be attributed to the cash
recovery from w/off accounts that jumped 335% to Rs. 87 crores. Bank of India
(BOI) continued the uptrend with PAT growth of 78% to Rs.562 crores, surprising
everybody.
technical analysis
Valuations
At the current price of Rs 281, the stock trades at 1.1x its
FY10E ABV of Rs 254. The bank, with its focus on the domestic as well as
international business has always surprised us on the upside and maintains ROE
above 20% and ROA above 1.2%. We believe that the same will continue, though
there will be some moderation in growth in near future. We believe a reasonable
margin, better operating efficiency and robust fee income generation will
enable the bank to produce ROE's in the range of 19%-20% over FY08-FY10E. We
believe the bank will be able to achieve 20% CAGR in advances book and 20% in
deposits over FY08-FY10E and expect a 17% CAGR in PAT over FY08-FY10E.
Technical outlook
The stock after making a base at 250 levels has bounced back
strongly and is presently consolidating at 280 levels before the next up move.
The stock downtrend during the recent fall in the market was halted at 267
levels which is the 61.8% retracement level of the recent rally from 268 to 300
levels. The volume in the stock has increased in the last few days signifying
more prices up move can be seen in the coming days.
The stock came under pressure due to profit-booking during
January and May 2008, which is in line with the market as a whole. The stock is
currently trading above the 50 days and 100 days simple moving average. Among
the oscillators RSI is above the benchmark level of 50 and is in rising mode
signalling more upside in the coming days. The immediate support comes around
260 levels. One can expect a target around 324 levels closing above that level
one can expect a target of 337.
Whatever you have, you must either use or lose.
Henry Ford
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