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BOI: Performance likely to get hit

May 21, 2001

FY01 has been a roller coaster year for one of Indiaís largest public sector banks, Bank of India (BOI). While in the first nine months of FY01 BOIís profits soared by 55%, its fourth quarter is likely to take away much of these gains. The profit growth in the first nine months was fueled by a sharp improvement in operating margins to 31% from 26.4% in the corresponding previous period. BOIís advances and deposits in the first nine months of FY01 grew by 17% and 14% respectively. However, growth is likely to be affected in the fourth quarter due to a slowdown in an economic and industrial activity. Credit growth in FY01 for the banking sector was put at 15.6% from 23% in the previous year. The marginal credit growth of 2.8% in fourth quarter took its toll on the overall credit growth.

Apart from this, the bank was also affected by the recent stock market scam. The bank is likely to take a hit of around Rs 1.2 bn in the pay-order scam emanating from Madhavpura Mercantile Co-operative Bank, which remained uncovered. A pay-order is a bank draft within the same centre. The bank issuing it, debits the account of the individual who is getting the pay-order. Thus, the other bank (BOI), which receives the instrument, safely presumes that the issuing bank has already recovered the money. However, in case of Madhavpura (the issuing bank), the amount was not debited. The instrument was used to discount it with BOI to obtain cash and the money was subsequently put into stocks. Consequently, the bankís provisions for non-performing assets which grew by 54% to Rs 3.3 bn in the nine months ended December í00 is likely to increase further in the fourth quarter.

Expected performance
(Rs m)FY01FY01EChange
Interest Income 47,370 53,056 12.0%
Other Income 7,860 8,327 5.9%
Total Income 55,230 61,383 11.1%
Interest Expenses 34,440 36,390 5.7%
Operating Profit 20,790 24,993 20.2%
Other Expenses 13,960 15,217 9.0%
Profits before Tax 6,830 9,776 43.1%
Provisions (including tax) 5,100 7,820 53.3%
Net Profit 1,730 1,956 13.1%
Equity shares (m) 638 638  

Key ratios
Operating Profit Margins27.3%31.4%
Net Profit Margins12.4%15.9%
EPS (Rs)2.73.1

In order to reduce the operating cost, BOI has implemented a VRS, which will right size the staff strength. The VRS would be given to around 7,000 employees (approximately 15% of total). However, it has not decided as yet on the manner of absorbing this cost. During the current budget, a new section (35 DDA) has been added clarifying the manner of writing off the VRS expenditure. It allows amortisation of VRS expenditure over five years beginning from FY02. BOI is unlikely to write off any expenses on account of VRS during the year, as it will get the tax benefits only from the next year. However, if it chooses to provide for the VRS this year BOI is likely to end FY01 in the red.

We have projected about 13% growth in BOIís net profits excluding provision for VRS for the year ended March í01. At the current market price of Rs 13, BOI is trading at a P/E of 4 times FY01 projected earnings. Its price to book value ratio of 0.3x is amongst the lowest in the sector.

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