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BOI: A long way to go

Aug 7, 2003

Bank of India, one of the largest public sector banks in the country, reported a 15% YoY rise in net profits on the back of a marginal (2%) rise in topline for the quarter ending June 2003. While topline growth was subdued, bottomline grew significantly due to falling interest expenses and rise in other income. Higher other income was seemingly due to healthy treasury gains from sale of investments.

(Rs m)1QFY031QFY04Change
Income from Operations 14,122 14,382 1.8%
Other Income 2,864 3,336 16.5%
Interest Expenses 9,429 9,041 -4.1%
Net interest income 4,693 5,341 13.8%
Other Expenses 3,762 4,148 10.3%
Operating Profit 931 1,193 28.1%
Operating Profit Margin (%)6.6%8.3% 
Provisions and Contingencies 1,423 1,62314.0%
Profit before Tax 2,372 2,907 22.5%
Tax 601 86744.4%
Profit after Tax/(Loss) 1,772 2,039 15.1%
Net Profit Margin (%)12.5%14.2% 
No. of Shares (m) 638.5 488.1  
Diluted Earnings per share (Rs)*14.516.7 
P/E Ratio (x) 2.8 
*(annualised)   

For 1QFY04, the bank reported a fall (3%) in interest income from advances, indicating pressure on its core business of lending. Interest income from investments also declined marginally. Competition from new private sector banks seems to have eaten into BOI's market share. Also, we believe that since the bank may be booking profits on its G-Sec portfolio, the investment portfolio may be shrinking and the incremental investments are being made at comparatively lower rates. Interest income on balances with RBI has shown a significant improvement (26%) and this has been the main reason for the topline growth. For FY04, we expect a 2.5% growth in topline.

The main highlight of the June quarter results was the fall in interest expenses that have significantly helped improve net interest income as well as the net interest margins (2.6% to 2.8%). Operating margins also improved as a consequence, despite a 10% rise in operating expenses.

Despite the noticeable rise in provisioning, BOI's bottomline improved by 15% owing to an improvement in operating profits as well as a rise in other income. While the bank may not be able to consistently book profits on its G-Sec portfolio in the long term, it will have to try even harder to improve its topline as well as operational performance. However, the main concern still plaguing BOI remains its high NPA levels. Despite the increased provisioning, the net NPAs to advances ratio has risen to 5.8% (5.4%), indicating laxity on the bank's part as far as credit risk assessment is concerned. In light of this, we may have to take a second look at our FY04 NPA estimates. (View research report)

At Rs 50, the stock is trading at an adjusted price to book value ratio of 1.3x its FY04E earnings. This is mainly due to the bank's high level of NPAs. BOI's NPA levels still continue to plague the bank's perception among investors and the bank does not seem to be doing enough to change the same. 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. The bank's topline growth is also now a concern as competition is slowly eating in to the bank's business. Valuations seem stretched considering the concerns that have been enumerated above.

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