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BOI: A stunner result

Jun 7, 2001

Bank of India has clocked an outstanding performance for the year ended March '01, in line with our projections. The bank's profits jumped by 46% with a 380 basis points improvement in operating margins and reduction in effective tax rate.

(Rs m)FY00FY01Change
Interest Income 47,370 53,169 12.2%
Other Income 7,855 8,619 9.7%
Interest Expenditure 34,431 36,630 6.4%
Operating Profit (EBDIT) 12,939 16,538 27.8%
Operating Profit Margin (%)27.3%31.1%
Other Expenditure 13,964 17,437 24.9%
Profit before Tax6,8307,72013.0%
Provisions & Contingencies 4,330 4,541 4.9%
Tax 771 661 -14.4%
Profit after Tax/(Loss) 1,728 2,519 45.7%
Net profit margin (%)3.6%4.7%
No. of Shares (eoy) 638 638
Diluted Earnings per share*2.73.9
P/E (at current price)3.8

During the year, BOI's advances grew by 21% and deposits were up by 17%. The bank's loan portfolio quality has improved significantly. Share of 'A' rated clients has gone up to 53% from 40% in the previous year. This has helped the bank in reducing its net NPA ratio to 6.7% from 8.6% in the previous year.

BOI's net profits growth was partly inflated by reduction in the tax payment. The effective tax rate of the bank was down to 9% from 11% in the previous year. Other expenses of the bank were higher due to absorption of VRS expenses of Rs 3.3 bn. During the year 7,768 employees opted for VRS and the total expenses of the scheme stood at Rs 8.9 bn (compensation package of Rs 1 m per employee). The bank plans to absorb the balance amount in the next three to four years to get the tax benefits. This exercise of the bank will result in annual savings of around Rs 1.7 bn (10% of operating expenses) in the wage bill, in turn improving the bottomline growth.

The bank has made full provision of Rs 1.4 bn for the pay-order scam. However, it is confident of recovering the amount. Remarkably, the bank's total provisions for non performing assets was up by a marginal 5%.

In a bid to reduce the government equity, BOI has decided to return 25% of its equity capital to the Central government. This move will bring down the government holding in the bank to 51% (from 76%). BOI will return close to Rs 1.5 bn paid up capital in cash which will effectively increase public holding in the bank to 49% (from 24%). Consequently the bank's capital adequacy ratio (CAR) will decline to 11% from the current 12.2%. Nevertheless, the bank is comfortably place in respect of CAR to meet future business growth. This decision of the bank will also improve shareholder value, as it will increase the per share earnings of the bank.

At the current market price of Rs 15, BOI is trading at a P/E of 4x and Price/Book value ratio of 0.4x. The bank declared a dividend of Rs 1.5 per share, translating into dividend yield ratio of 10%. Further the current book value of Rs 39 is likely to go up to Rs 49 with a reduction in the government's stake in the bank. The bank is likely to maintain high growth in profits in the next few years with employee cost savings and improvement in quality of assets.

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