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BOI: Taking the treasury hit

Jan 24, 2005

Performance Summary
In the midst of speculations about its prospective merger with Union Bank of India, Bank of India (BOI) has posted very disappointing results for the 3QFY05.While most of its peers have recovered from the negative surprise on the treasury side, BOI continues to be paralyzed by the same. Along with treasury losses puncturing its bottomline (dipped by 67% YoY), the bank has also performed poorly in terms of its net interest income which has grown by merely 4% YoY. However, what is heartening to note is that the bank is consistent in its efforts to pare its NPAs and has continued to step up its provisions (grown by 33% YoY) for the same.

Rs (m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Income from operations 14,832 15,098 1.8% 43,253 44,405 2.7%
Other Income 3,789 2,334 -38.4% 12,035 7,682 -36.2%
Interest Expense 8,875 8,907 0.4% 26,928 26,873 -0.2%
Net Interest Income 5,957 6,191 3.9% 16,325 17,532 7.4%
Other Expense 4,361 4,717 8.2% 12,775 13,887 8.7%
Operating profit / (loss) 1,596 1,474 -7.6% 3,550 3,645 2.7%
Operating profit margin (%) 10.8% 9.8%   8.2% 8.2%  
Provisions and contingencies 2,015 2,684 33.2% 5,887 7,154 21.5%
Profit before tax 3,370 1,124 -66.6% 9,698 4,173 -57.0%
Tax 1,084 374 -65.5% 3,105 1,300 -58.1%
Profit after tax/ (loss) 2,286 750 -67.2% 6,593 2,873 -56.4%
Net profit margin (%) 15.4% 5.0%   15.2% 6.5%  
No. of shares (m) 488.0 488.0   488.0 488.0  
Diluted earnings per share (Rs)* 18.7 6.1   18.0 7.8  
P/E (x)         9.6  

Bleeding with bad assets
Bank of India (BOI) is the third largest bank in India in terms of assets. The bank has a network of 2,551 branches inclusive of 19 foreign branches and 250 ATMs. It has a large reach in the rural and semi-urban areas with more than 31% of its aggregate deposits coming from these regions. While BOI is one of the largest banks in the country, it also has a significant amount of non-performing assets (NPAs). Net NPAs to advances ratio, which stood at 3.9% in 3QFY05, is among the highest in the industry.

What drove performance in 3QFY05?
Margin pressures: While the bank has achieved 19% and 11% growth in its advances and deposits respectively, the said growth is very nominal as compared to most of its peers in the sector, which have shown a robust growth in topline. With retail credit growing at 37% YoY, the share of low cost deposits has marginally improved from 38% (in 2QFY05) to 40% in this quarter. Also, the costs of funds have declined to 4.1% from 4.5% in the previous quarter. However, the bank continued to face pressure on its operating margins in the third quarter.

Other ‘income’ hit: Despite having transferred G-Secs of Rs 3.8 bn to the ‘held to maturity’ category in 2QFY05, the bank has booked treasury losses to the tune of Rs 1.5 bn in 3QFY05. In the rising interest rate regime treasury operations are unlikely to yield the bank any gains in the coming quarters. However, it is pertinent to note that the bank has its investment fluctuation reserve standing at 10% of the security value, which is well above the stipulation of 5%.

Conservative provisioning: Despite a hit in the bottomline the bank has sustained its conservative approach when it comes to provisioning. The bank has successfully pruned its high NPA levels over the past few quarters by consistently hiking its provisions for the same. All said, given a Net NPA to advances ratio of 3.9%, the bank continues to persist at the bottom of the league when it comes to asset quality.

What to expect?
At the current price of Rs 75, the stock is trading 0.9 times its 3QFY05 book value. Due to its poor asset quality the stock is accorded a price band of 0.25x to 0.75x book value. Although its CAR is 11%, the below average growth in credit and continuing treasury losses do not substantiate the current valuations. Also, considering the complexities involved in the merger with UBI (read our view on the same) we believe that BOI will be an under performer compared to its peers in the medium term.

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