Bank of India (BOI), the third largest bank in the country, reported a rather improved quarterly performance for the September quarter relative to its performance over the last few quarters. For 2QFY05, while the bank's topline rose 8% YoY, operating margins witnessed a YoY growth of nearly 9%. But this was negated due to treasury losses (other income declined by 47%). There has however, been a significant improvement in the bank's net interest income highlighting the strength of its core business. What is heartening to note is that, despite a 78% decline in the bottomline, the bank has augmented its provisions by 39%. This largely includes provision for bad assets.
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Bank of India (BOI) is the third largest bank in India in terms of assets. The bank has a network of 2,551 branches inclusive of 19 foreign branches and 239 ATMs. It has a large reach in the rural and semi-urban areas with more than 31% of its aggregate deposits coming from these regions. While BOI is one of the largest banks in the country, it also has a significant amount of non-performing assets (NPAs). Net NPAs to advances ratio, which stood at 4.2% in 1HFY05, is among the highest in the industry.
What has driven the performance in 2QFY05?
Retail credit contribution increases: Despite its size, Bank of India posted an impressive 16% growth in advances. Total deposits, on the other hand, grew by 13%. Of this, share of low cost deposits increased to 38.6% in 2QFY05 from 36.4% in 2QFY04. Retail credit stood at Rs 92 bn constituting 25% of non-food credit of the bank. Housing loan constituted 5.5% of non-food credit and increased by 59% (YoY). Total mortgage loan portfolio augmented by a robust 182%.
Cushion from lower cost of deposits: The cost of deposits declined to 4.2% in 2QFY05 (4.8% in 2QFY04), which is line with the sector itself. This coupled with a decline in operating expenses (as a percentage of average working funds) from 2.2% to 2.1% enabled the bank to amplify its operating margins by 9%. Though BOI continues to reduce its interest expenses, its operating expenses have been rising sharply and have taken a toll on margins. Operating expenses have risen mainly on account of higher contribution to pension and gratuity funds as well as higher overhead expenses. We believe that the bank is likely to face a scenario of rising operating expenses on account of implementation of better technology and higher employee expenses, due to revision in their wages.
Other income effect on profits: The rise in interest rates took a heavy toll on the bank’s treasury income that reduced its other income by 47%. The bank booked mark to market losses to the tune of Rs 3,833 m on account of transfer of assets from ‘Available for sale (AFS)’ to ‘Held to maturity (HTM)’ category. Although its NPAs as a percentage of net advances declined from 5.4% (FY03) to 4.2%, the bank made substantial provisions to cope with its bad assets portfolio. Provisions to the tune of Rs 680 m have also been made for VRS as per RBI guidelines. Thus despite the improvement in operational performance, the bank’s bottomline got punctured due the ‘other income’ hit and provisioning.
What to expect?
At the current price of Rs 96 the stock is trading at 1.2 times its book value. Speculations are ripe about the bank’s merger with Union Bank of India, which is expected to bring cleaner assets to the bank. However, unless it materializes, it is too risky to pre-empt such corporate actions, from a investors standpoint. Although the stock is at the lower end of valuations in the PSU banks’ spectrum, poor historical track record with respect to its asset quality and productivity parameters will continue to weigh on the stock price.
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