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BOI: Taking one step at a time

Jul 13, 2001

Bank of Indiaís fourth quarter performance was satisfactory with a growth of 14% in interest income. The bankís bottomline took a hit because of write off for VRS expenses of Rs 3.3 bn. BOI is slated to announce its 1QFY01 results in the next week. We have attempted to forecast its quarterly performance based on the industry trend and the bankís restructuring initiatives.

Due to downturn in the economic activity and a slowdown in the industrial growth, BOI will have less lending opportunities, which will affect its growth in advances. As a result topline of the bank is likely to show a single digit growth. The bank's loan portfolio quality is improving. Share of 'A' rated clients has gone up to 53% in FY01 from 40% in the previous year. This will help the bank in bringing down the ratio of non-performing assets (NPA) to advances.

Expected performance
(Rs m) 1QFY00 1QFY01 1QFY02E Change*
Interest Income 11,390 11,960 12,797 7.0%
Other Income 1,270 1,490 1,714 15.0%
Total Income 12,660 13,450 14,511 7.9%
Interest Expenses 8,220 8,540 8,792 2.9%
Operating Profit 4,440 4,910 5,719 16.5%
Other Expenses 3,230 3,650 3,546 -2.9%
Profit before Tax 1,210 1,260 2,173 72.5%
Provisions & contingencies 600 600 1,108 84.7%
Net Profit 610 660 1,065 61.3%
Equity shares (m) 638 638 638
* Change over 1QFY01

Key ratios
Particulars 1QFY00 1QFY01 1QFY02E
OPM 27.8% 28.6% 31.3%
NPM 5.4% 5.5% 8.3%
EPS (Rs) 3.8 4.1 6.7

Reduction in number of employees by about 15% to 44,000 is expected to reduce the cost to income ratio of the bank to 54% in FY02 from 56% (excluding provision for VRS) in FY00. This would not only double the profits of the bank but would also improve the productivity ratios of the bank. BOIís revenues per employee and profits per employee at Rs 1.3 m and Rs 0.1 m stand on the lower side compared to its other public sector peers.

Provision for non-performing assets (NPAs) increased by a marginal 5% in FY01. BOIís provision coverage at about 36% is on the lower side, compared to 57% by SBI, 65% by Corporation Bank and 56% by Bank of Baroda. This has resulted in higher NPA ratio of 6.7%. If the bank increases provision coverage, financials would reflect correct picture.

At the current market price of Rs 15.7, BOI is trading at a P/E of 2x and Price/Book value ratio of 0.3x FY02 projected earnings. 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%). This decision of the bank will help improve shareholder value, as it will increase the per share earnings of the bank.

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