3QFY11 Results Update

SECTOR: BANKING

Bank of India
BSE SENSEX

19,008
Bloomberg
Equity Shares (m)
52-Week Range (Rs)

S&P CNX

5,697

Neutral

BOI IN
525.9
588/309

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

9/9/9

M.Cap. (Rs b)

242.4

M.Cap. (US$ b)

Rs461

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 growth
of 33% YoY and 12% QoQ surprised us positively (8% higher than our estimate, led by a 28bp QoQ and 49bp YoY
expansion in global NIM). However, accelerated provisions for the second pension option of Rs2.3b, provisions for CLN
note (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 global
CD 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. In
3QFY11 one large aviation account worth ~Rs5b was upgraded, but the bank has not reversed provisions made for
this to boost coverage ratio. Slippages in 3QFY11 were Rs4.8b against Rs8.2b a quarter earlier. Annualized slippage
ratio was 1.1% for 3QFY11 against ~1.7% in 1HFY11 and 2.9% in FY10. Provision coverage ratio including technical
write 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 making
provisions considering the liability of Rs40b (to be amortized over five years). In 1HFY11 the bank had made a
provision of Rs900m each quarter and held Rs1.6b of additional provisions. In 3QFY11, apart from normal a quarterly
run rate provision of Rs900m, it made accelerated provision of Rs2.3b during the quarter. This, overall provision made
so 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.

Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com) +9122 39825415/ Abhishek Agarwal (Abhishek.Agarwal@motilaloswal.com) +9122 39825414

Bank of India

Global margins up 28bp QoQ

Global margins improved 28bp QoQ and 49bp YoY led by contained cost of deposits and
improvement in yield on assets. Domestic margins improved 32bp QoQ and 38bp YoY to
3.49%. Domestic cost of deposits declined 4bp QoQ to 5.61%, a positive surprise as the
industry 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 the
base rate). Yield on investment (domestic at 7.93% and global at 7.71%) remains elevated
and it is one of the highest in the industry. Due to higher deposit re-pricing over 2-3
quarters margins are expected to decline in 2-3 quarters from current levels.
Trends in yields, costs and margin (%)

Yield on loans
Cost of deposits
NIMs

22 January 2011

Global

3QFY11
Domestic

Foreign

Global

2QFY11
Domestic

Foreign

Global

8.78
4.97
3.09

10.35
5.61
3.49

3.05
1.28
1.45

8.47
4.99
2.81

10.04
5.65
3.17

3.09
1.30
1.37

8.41
5.26
2.60

3QFY10
Domestic

Foreign

9.91
3.00
5.90
1.58
3.11
0.82
Source: Company/MOSL

Bank of India

Business growth over 20%, CASA ratio down ~100bp QoQ

Global and domestic loans grew by ~5% QoQ and ~23% YoY to Rs1.93t (domestic loans
at Rs1.51t). Strong growth in corporate loans drove overall loan growth. Corporate loans
grew ~5% QoQ and ~47% YoY to Rs867b, led by over 50% growth in the infrastructure
segment. 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 declined
2% 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% QoQ
Gross and net NPAs in absolute amounts declined 7% and 20% QoQ to Rs45.4b and
Rs16.6b 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 to
2.36% and 0.88% respectively. In 3QFY11 one large aviation account worth Rs5b was
upgraded but the bank has not reversed provisions made for the same to boost coverage
ratio.
Overall upgradations in 3QFY11 was (Rs6.1b v/s Rs1.2b a quarter earlier) and recoveries
were Rs2.1b against Rs1.9b a quarter earlier. Write offs were negligible during the quarter
and slippages were Rs4.8b v/s Rs8.2b a quarter earlier. 3QFY11 annualised slippage ratio
was 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 FY11
and FY12.
Trading profits decline
Non-interest income grew 11% QoQ and 13% YoY. Treasury gains declined sharply to
Rs549m against Rs1.37b in 3QFY10. Recoveries in 3QFY11 were Rs658m against Rs301m
in 2QFY11 and Rs332m in 3QFY10. Fee income grew 21% YoY and was sequentially
flat. Forex income was Rs1.3b (against Rs1.3b in 2QFY11 and Rs758m a year earlier).
Valuation and view
Asset quality, which has remained volatile so far in FY11, is a key factor for earning
traction. 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 performance
and margins are being offset by higher provisions and opex. We expect BoI to post EPS of
Rs51 in FY11, Rs64 in FY12 and Rs79 in FY13 and BV will be Rs284 in FY11E, Rs335 in
FY12E and Rs398 in FY13E. The stock trades at a P/E of 7.2x FY12E EPS, 5.8x FY13E
EPS and P/BV of 1.4x FY12E BV and 1.2x FY13E BV. We have a Neutral rating.

22 January 2011

Bank of India

Trend in loans
Loan (Rs b)

Loan Grow th (%)

38.8
35.0
26.1

22.7
20.3

22.8

19.6

1,928

1,768

15.3
1,570

1,502

1,478

1,447

1,361

1,293

1,229

16.2

18.4

1,844

31.3

1,713

Loan growth in line

with the industry

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

Deposit trends
Deposits (Rs b)

Deposits Grow th (%)

30.1
26.5
21.1

19.8

21.3

22.6

2,525

20.0

2,060

1,987

1,950

1,897

1,717

1,642

1,592

21.0

2,411

22.5

2,337

26.4

Deposit growth
tracks loan growth

2,298

26.7

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

Trend in CD ratio (%)

78.7

79.3

77.2

76.3

Global CD ratio
sequentially stable

75.8

75.6

76.2

75.7

76.5

76.3

74.6

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

CASA ratio declines sequentially (%)

4.4

4.4
4.1

3.9

CA deposits declined
2% QoQ (up 8% YoY)
and SA deposits grew by
3% QoQ (up 26% YoY)

3.5
3.0

3.4

3.4

3.3

4.0

3.2

1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11
Source: Company/MOSL
22 January 2011

Bank of India

Trend in fee income(Rs b)

4.4

4.4

4.1

3.9

Fee income grew by over

20% YOY (Rs b)

3.5

3.4

3.4

3.3

4.0

3.2

3.0

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

Trend in treasury income(Rs b)

4.4

2.4

2.2

Treasury income
declines YoY

1.5

1.4
1.0

0.7

0.7
0.4

0.2

0.6

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

Trend in slippages (%)

15.0

14.1

Annualised slippage ratio of

1.1% for 3QFY11 against
~1.7% in 1HFY11 and
2.9% in FY10

8.2
5.6

5.2

6.5

5.9

6.2
4.8

3.0

2.9

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

Asset quality improves sequentially

GNPA (%)
74.6
63.4

0.9

1.1

1.2

57.5

2.4

57.0

2.6

54.8

2.7

61.9

1.1
2.6

0.8
1.9

0.4

1.7

1.6

0.5
1.5

1.6

0.5

59.1

1.3

67.6

2.9

68.4

PCR (%)

1.0

69.3

2.7

68.8

0.5

Higher upgradations and

lower slippages lead to
positive surprise on
asset quality

NNPA (%)

1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11
Source: Company/MOSL
22 January 2011

Bank of India

Bank of India: an investment profile

Company background
Bank of India is the third largest state-owned bank, with a
balance sheet size of Rs2.75t. It has a pan-India presence
and more than 3,200 branches with an overseas network
extending 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. About
19% of the restructured portfolio has slipped into the
NPA category.
Business growth moderated in FY10 as the bank was
cautious 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 core
C/I ratio.
Key investment risk
Asset quality remains a key factor for earning traction
ahead which had remained volatile during FY11. In
FY10, higher slippages kept NIMs subdued and resulted
in higher credit costs.
Comparative valuations
P/E (x)
P/BV (x)
RoE (%)
RoA (%)

FY11E
FY12E
FY11E
FY12E
FY11E
FY12E
FY11E
FY12E

Recent developments
Bank of India raised the interest rate on retail term
deposits by 25-75bp in different maturity buckets in
January 2010.
In December 2010 it hiked its base rate by 50bp and
PLR 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 of
7.2x FY12E EPS and P/BV of 1.4x FY12E BV. We
have 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 a
significant NIM compression.
We believe margins will compress gradually. With strong
loan growth and a high CD ratio, there is strong pricing
power with banks.
Banks with high CASA deposits and a lower proportion
of bulk deposits will be preferred bets.

EPS: MOSL forecast v/s consensus (Rs)

BoI

PNB

BoB

9.0
7.2
1.6
1.4
19.5
20.6
0.9
0.9

8.1
6.7
1.8
1.5
24.1
24.2
1.3
1.3

8.1
6.9
1.8
1.5
24.4
23.5
1.2
1.2

MOSL
Forecast

Consensus
Forecast

Variation
(%)

FY11

51.4

50.2

2.4

FY12

63.9

65.1

-1.9

Target
Price (Rs)

Upside
(%)

Reco.

469

1.8

Neutral

Target Price and Recommendation

Current
Price (Rs)
461

Stock performance (1 year)

Bank of India

Sensex - Rebased

600

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

22 January 2011

510
420
330
240
Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Bank of India

Financials and Valuation

22 January 2011

Bank of India

Financials and Valuation

22 January 2011

Bank of India

N O T E S

22 January 2011

Bank of India

For more copies or other information, contact

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Phone: (91-22) 39825500 Fax: (91-22) 22885038. E-mail: reports@motilaloswal.com

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Disclosure of Interest Statement
1. Analyst ownership of the stock
2. Group/Directors ownership of the stock
3. Broking relationship with company covered
4. Investment Banking relationship with company covered

Bank of India
No
No
No
No

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22 January 2011

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