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BOI: NPA concerns remain

Apr 30, 2003

Bank of India, has reported a significant jump in its profits both for 4QFY03 as well as FY03. While topline growth has been subdued bottomline has grown significantly due to improving operating margins as well as strong rise in other income, seemingly due to healthy treasury gains from sale of investments. Net profits for 4QFY03 have grown by 188%, while for FY03 it stood at 67% YoY. Topline growth stood at 6% for FY03.

(Rs m)4QFY024QFY03Change FY02 FY03Change
Income from Operations 14,394 15,574 8.2% 56,087 59,282 5.7%
Other Income 4,229 5,979 41.4% 11,033 16,424 48.9%
Interest Expenses 9,876 9,954 0.8% 37,690 38,920 3.3%
Net interest income 4,518 5,620 24.4% 18,397 20,362 10.7%
Other Expenses 4,273 4,407 3.1% 15,309 16,486 7.7%
Operating Profit 245 1,213 395.4% 3,088 3,876 25.5%
Operating Profit Margin (%)1.7%7.8% 5.5%6.5% 
Provisions and Contingencies 3,081 3,3217.8% 7,201 8,69820.8%
Profit before Tax 1,393 3,872 178.0% 6,920 11,602 67.7%
Tax 411 1,046154.3% 1,831 3,09268.8%
Profit after Tax/(Loss) 981 2,825 187.9% 5,088 8,510 67.2%
Net Profit Margin (%)6.8%18.1% 9.1%14.4% 
No. of Shares (m) 638.5 488.1   638.5 488.1  
Diluted Earnings per share (Rs)*8.023.2 10.417.4 
P/E Ratio (x)    2.4 
*(annualised)      

For FY03 the bank's topline has been primarily driven by the healthy increase in interest income from advances. This seems primarily due to higher disbursals by the bank helping it increase its assets significantly. The growth in this revenue stream is of importance for BOI when considering that fact that it is one of the largest banks in the country. Despite competition from new private sector banks BOI seems to have grown its advances handsomely. However, interest income from investments has not grown significantly. This is primarily due to the fact that incremental investments are at a low rate of interest.

(Rs m) FY02 FY03Change
Interest on advances 32,929 35,608 8.1%
Income from investments 19,186 19,977 4.1%
Interest on Balances 3,490 2,689 -23.0%
Others 483 1,009 108.9%
Total56,08759,2825.7%

In FY03 and specifically in 4QFY03, net interest income has risen considerably. This points to an improvement in net interest margins especially in the March quarter. This is also evident as interest income has outpaced growth in interest expenses. Consequently, operating margins have improved. What is also noteworthy is the fact that operating margins have improved despite the bank's provisioning for VRS expenses as part of its operational expenses. Since the bank has a very large network, it does not have to concentrate on expanding infrastructure and thus when VRS expenses are written off completely, operating margins are likely to improve even further.

Improvement in operating margins is also apparent from the improvement in cost to income ratio. The improvement is more prominent in the March quarter. For 4QFY03 cost to income ratio stood at 38% (49%) while it is 45% for FY03 (52%). A significant part of this improvement is due to a considerable increase in other income. This may have been mainly due to profit booking in the bank's investment portfolio. Having said that, we cannot rule out the contribution of higher operational efficiencies in the same.

Provisioning of the bank increased by nearly 21% in FY03. This augurs well for a bank whose net NPAs to total advances ratio stands at 6% (FY02) against a regulatory stipulation of 5%. Despite the higher provisioning, the net profits of the bank have increased by 67% in FY03 compared to same period last year.

At Rs 42, the stock is trading at an adjusted price to book value ratio of 1.5x its FY04E earnings. This is mainly due to the bank's high level of NPAs. BOI's growth momentum had slowed down in the December quarter, but the March quarter has changed that. Higher income from advances has been the key highlight for the company's performance in FY03. This is despite increased competition from private sector banks both in retail and corporate lending segments. Having said that, we must also point out that the bank has a significant amount of NPAs in its books. Going forward valuations will depend on how fast the bank is able to clean up its books, at the same time maintaining its growth momentum. Wait and watch.


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