• APRIL 1, 2002

BoI: Capital restructuring to benefit

In an ongoing restructuring process, Bank of India (BoI) has reduced its capital base to Rs 4.9 bn from Rs 6.4 bn by returning Rs 1.5 bn to the Reserve Bank of India (RBI) in cash. The bankís move is likely to shore up itís earning per share and book value significantly in FY02.

BoI had plans to return Rs 3 bn, but a contentious provision, which was incorporated in 1995, in the Banking Companies (Acquisition and Transfer of Undertakings) Act, prevented it from doing so. As per provisions of the said Act, the paid-up capital of a public sector bank should not drop below 25% of its capital from the day the amendment to the Act was passed.

In the case of BoI, its capital, when the provision was incorporated, stood at Rs 19.5 bn (including losses carried forward and not written off). Consequently, BoI's capital, technically, cannot drop below Rs 4.9 bn at any given point of time.

The bank reported encouraging financial performance for the first nine months of FY02. Although its interest income registered a slower growth of 6.6%, net interest income registered a double-digit growth on the back of a sharp (more than proportionate) decline in cost of borrowings. Also, cost control measures initiated by the bank (like VRS) in the previous years helped the bank in achieving higher pre tax profits. The bank took the advantage of higher profits to write off non-performing assets, which resulted in 67% rise in total provisions of the bank.

Financial snapshot
(Rs m)9m FY019m FY02Change
Interest Income 39,100 41,693 6.6%
Other Income 4,950 6,804 37.5%
Interest Expenses 26,970 27,814 3.1%
Net Interest Income 12,130 13,879 14.4%
Other Expenses 11,030 11,036 0.1%
Profits Before Tax 6,050 9,647 59.5%
Provisions & Contingencies 3,320 5,539 66.8%
Profits After Tax 2,730 4,108 50.5%
Equity shares (m) 638 638

A 400 basis points jump in the bankís operating margins was contributed by reduction in cost of borrowings and operating expenses. Similarly, cost to income ratio decline to 53% with savings in employee cost. A 38% rise in fee-based income increased the contribution of other income to total income to 14%. However, the ratio is still on the lower side compared to its peers in the sector.

Key ratio analysis
Particulars9m FY019m FY02
OPM (excl. other income)2.8%6.8%
Cost to income ratio64.6%53.4%
Other income to total income11.2%14.0%
EPS (Rs)*5.78.6
EPS after reduction in share capital*- 11.2
Adjusted Price/Book value ratio-1.2

The paring of capital base is likely to improve the bankís valuations. Its earnings per share on 9m FY02 annualized basis will increase by 31% to Rs 11.2. With number of shares reducing to 489 m, the bankís adjusted book value has also increased significantly to about Rs 21 for FY02 projected earnings. At the current market price of 25, the stock is trading at a P/E of 2.2x 9 months annualized earnings. Its adjusted price to book value ratio (after removing the net non-performing assets, on a conservative basis) of 1.2x is in line with its public sector peers in the industry. In the last two months the scrip has soared by over 50% from the date it declared its third quarter results.

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