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BOI: OPM fuels profits - Views on News from Equitymaster
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  • May 21, 2002

    BOI: OPM fuels profits

    Bank of India doubled its profits for the year ended March 2002 on the back of a sharp improvement in operating margins. However, the bank's interest income witnessed a single digit growth during the year, due to slowdown in the industrial activity.

    (Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
    Income from operations 14,069 14,394 2.3% 53,169 56,087 5.5%
    Other Income 3,669 4,228 15.2% 8,619 11,033 28.0%
    Interest expense 9,660 9,876 2.2% 36,630 37,690 2.9%
    Net interest income 4,408 4,518 2.5% 16,538 18,397 11.2%
    Other expenses 6,407 4,273 -33.3% 17,437 15,309 -12.2%
    Operating Profit (1,999) 245 - (899) 3,088 -
    Operating Profit Margin (%) -14.2% 1.7%   -1.7% 5.5%  
    Provisions and contingencies 560 3,082 450.1% 4,541 7,201 58.6%
    Profit before Tax 1,110 1,392 25.4% 3,179 6,920 117.6%
    Tax 661 412 -37.7% 661 1,831 177.2%
    Extraordinary items - -36   - -36  
    Profit after Tax/(Loss) 449 944 110.1% 2,519 5,052 100.6%
    Net profit margin (%) 3.2% 6.6%   4.7% 9.0%  
    No. of Shares (m) 638.0 488.1   638.4 488.1  
    Diluted Earnings per share* 3.7 7.7   5.2 10.4  
    P/E Ratio   3.5     2.6  

    The bank's operating margins increased to 5.5% during the year from a negative 1.7% in the previous year. (In FY01, operating margin stood at 4.5% excluding VRS write off of Rs 3.3 bn). The bank's VRS initiative launched last year, is reflected positively in FY02's financial performance, as its cost to income ratio declined to 52% from 69% in FY01. BOI wrote off Rs 1.4 bn in FY02 towards VRS expenses. which is included in operating expense. BOI's operating margins are expected to improve further by 100 basis points in the next two years.

    After having recorded a double digit growth in interest income, the bank's income from both advances and investments slowed down in FY02. Stiff competition from private banks coupled with a downturn in economy impacted the bank's income growth. The growth in fee based income was also lower compared to its peers in the sector. Other income accounted for 16% of total income of the bank.

    Income breakup
    (Rs m) FY01 FY02 Change
    Interest on advances 31,287 32,929 5.2%
    Income from investments 18,057 19,186 6.3%
    Interest on balance with RBI 3,577 3,490 -2.5%
    Others 247 483 95.1%
    Total 53,169 56,087 5.5%

    During the year, BOI reduced its capital base by returning equity of Rs 1.5 bn to the government of India in cash. The bank also paid Rs 36 m interest to the government after adjusting for dividend payable. At the current market price of Rs 27, the stock is trading at an adjusted price to book value ratio of 1.3x and P/E of 3x FY02 earnings. In FY02, the bank increased provisions for non-performing assets substantially, which is likely to bring down its net NPA ratio to below 6.5%. Valuations of the bank will be re-rated once its asset quality is improved.



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