Bank of India, Indiaís second largest bank has recorded impressive financial performance for the 9 months ended December 2000. Sharp increase in operating margins of the bank due to higher yield on advances and low cost of deposits boosted the profit growth of the bank.
The bankís advance and deposits also increased by 17% and 14% respectively during the same period. It has a large reach in the rural and semi-urban areas with more than 31% of its aggregate deposits coming from these. BOI has increased the pace of growth of its deposits and advances. It now plans to consolidate its position and clean up its books.
Profits before tax & provisions
Provisions (including tax)
No. of shares (m)
(Tax+provisions) / PBT
The bank has a fairly large network of 2,520 branches to source retail deposits and more than 21% of its deposits are from savings account. This has helped the bank to maintain the lower cost of deposits. As a result its operating margins improved by more than 450 basis points to 31%, in line with other private sector banks.
During the quarter BOI has launched a VRS scheme in order to improve the productivity of the bank. It has received applications from more than 7,500 employees for the purpose. However, it has not decided as yet on the manner of absorbing this cost. If it decides to write off at least half of the VRS expenses, profits will take a hit in March 2001. Nevertheless, the bank's return on equity is expected to improve substantially in FY02 and FY03.
We have projected a growth of over 15% in interest income for the year ended March 2001. The bankís operating margins during the year is expected to increase by around 400 basis points. Apart from low cost deposits, abolition of interest tax with effect from April 2000 has also contributed in higher margins. BOIís profits in future would be driven by greater attention to costs, higher volumes, fee-based income and new customised products.
BOI is trading at a P/E multiple of 2.6 times and Price/Book value ratio of 0.4 times. Its valuations are amongst the lowest in the Industry. This is attributed to several factors, which include high NPA ratio (7.3%), low capital adequacy ratio (9.6%) and slower adoption of technology. As of now the bank has computerized only 522 (21% of total) branches. It is yet to offer facilities of anywhere, anytime banking, Internet banking and tele banking. Also it is lagging behind in terms of offering value added services like credit/debit cards, insurance and mutual fund products. BOIís future re-rating depends on its successful implementation of above plans.
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