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Bank of India: Analyst meet extracts - Views on News from Equitymaster
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Bank of India: Analyst meet extracts
Aug 24, 2005

The management of Bank of India (BOI), in its analyst meet post announcing the 1QFY06 results, highlighted certain operational updates and plans for the future. Following are key excerpts from the same. Assets – priority skewed: BOI has witnessed a 24% YoY growth in its advance book at the end of 1QFY06. The same was below the sector average of 26% YoY growth. Food and non-food segments witnessed respective growth of 3% and 25% YoY, thus comprising 5% and 95% of total loan book respectively. In the non-food segment, the bank continued to have a higher exposure to corporate loans (75%) that grew by 24% YoY. While in retail, both home loans and auto finance showed impressive growth rates of 57% YoY and 154% YoY respectively.

(Rs bn) 1QFY05 1QFY06 % of total Change
Food credit 21.1 21.7 4.9% 2.8%
         
Non food credit (i+ii) 339.2 424.2 95.1% 25.1%
         
(i) Retail 84.3 107.6 25.4% 27.6%
Home loans 18.2 28.6 26.6% 57.1%
Auto Finance 4.3 10.9 10.1% 153.5%
Mortgage loans 2.9 8.8 8.2% 203.4%
         
(ii) Corporate 254.9 316.6 74.6% 24.2%
Gross advances 360.3 445.9   23.8%

But the disturbing fact is that the bank has more than necessary allotment of assets to the ‘priority’ (defined as farm loans, loans to small scale industries, home loans upto Rs 1 m, education loans etc.) and agriculture segments. The minimum mandate for the same (as per RBI norms) is 40% and 18% of the advance book respectively. However, Bank of India has more than 50% of its net credit in the priority sector and has disbursed 20% to the agricultural sector. This is despite the fact that priority loans are typically low yielding and the bank has an average gross NPA to advance ratio of 8% to 8.5% in the agri loans basket.

Overseas exposure: BOI has more than 20% of its assets in the overseas markets. At the end of 1QFY06, the bank had garnered 23% of its total advances and 17% of its deposits from overseas. Most of these assets are LIBOR linked and with the recent spate of rise in interest rates have put the bank’s margins under pressure. The bank had net interest margins of 2.7% at the end of FY05 (one of the lowest amongst PSU banks). Not to mention, the overexposure to priority sector credit also offers the bank very little headroom for margin expansion.

Amortisation hit: As against the general practice amongst banks to book amortisation for depreciation on investments (mark to market for investments in the AFS category) under ‘provisioning’, the bank has booked the same under ‘interest expended’. As a result, this ‘extraordinary’ expense (to the tune of Rs 690 m) has bloated the bank’s interest cost and pruned its net interest margins (NIMs). While the NIMs stood at 2.6% at the end of 1QFY06, the same were 2.9% without considering the amortisation costs. Having a decent proportion of low cost deposits (38% of total deposits) also seems to have done little to aid the bank’s margins.

De-risked investment portfolio: It must however be noted that BOI has one of most well hedged investment portfolios in the sector. The same can be said not only in terms of percentage of investments in the HTM (held to maturity) category, but also the duration of investments in the AFS (available for sale) category. BOI has 78% of its investments in the HTM category and one of the lowest durations (1 year) in the AFS category. Both of these facts suggest that the bank stands very well hedged with respect to interest rate risk if the rates are to head northwards, going forward.

Recoveries prune NPAs: Besides a 37% fall in incremental slippages, the bank has managed to recover NPAs of Rs 8 bn by FY05. The same coupled with higher write offs has helped the bank reduce its gross and net NPA to advance ratios from 7.9% and 4.5% in FY04 to 5.3% and 2.6% respectively at the end of 1QFY06. Also, the provisioning coverage ratio has improved from 45% in FY04 to 53% in 1QFY06.

Future plans: The bank has outlined the following targets for FY06:

  • Increasing the number of CBS (core banking solution) enabled branches from 213 in FY05 to 750 (of 2,562 branches) in FY06. The capex earmarked for the entire CBS project is Rs 500 m to Rs 600 m each year for the next 10 years.

  • Setting up a hub in Singapore to network all foreign branches

  • Setting up specialised branches for SME lending (target SME asset base Rs 30 bn)

  • Raising additional capital through a follow-on public issue in 2QFY06

Our view
Although, it is not to be denied that BOI is making consistent efforts to recoup lost opportunities, the bank has a long way to go to catch up with its peers. Besides having one of the lowest interest margins and highest NPAs in the sector, the bank is also burdened with high overheads (cost to income ratio of 57% in FY05). Inadequate capital (CAR of 10.6% in 1QFY06) also poses restrictions in terms of asset expansion.

At the current price of Rs 134, the bank is trading at 2 times our estimated FY07 adjusted book value and is fully priced. Although additional capital (public issue envisaged in FY06), superior growth momentum and better asset quality may call for higher valuations for the bank going forward, the same cannot be assured at the current levels.

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