Buy Bank of India: target of Rs 582: Motilal Oswal

Motilal Oswal is bullish on Bank of India and has recommended buy rating on the stock with a target of Rs 582 in its October 22, 2010 research report.
“Bank of India PAT grew 91% YoY (on a lower base) to Rs 6.2 billion (11% lower than our estimate of Rs 7 billion). Higher provisions (led by higher slippages, to reach 70% PCR) and lower-than-expected NII growth led to lower-than-expected profits. Some of the key positives are (1) a pick-up in fee income, (2) strong CASA growth, and (3) improvement in loan growth QoQ.”

“Reported gross NPA (up 2% QoQ) and net NPA were stable sequentially at Rs 48.7 billion and Rs 20.7 billion respectively. Calculated PCR was stable at 57.5% (including write-offs, PCR is 70%, in line with RBI guidelines). Addition to gross NPA was higher than expected at Rs 8.1 billion (annualized slippage ratio of 2%), but higher reductions by way of write-offs (Rs 3.7 billion) resulted in stable gross NPA QoQ. Lower upgrades (Rs 1.2 billion versus Rs 2.1 billion a quarter Bank of India 22 October 2010 3 earlier) and recoveries (Rs 1.9 billion versus Rs 2.4 billion a quarter earlier) were a disappointment. Gross NPA and net NPA ratio declined by 7bp and 4bp QoQ to 2.64% and 1.14% respectively.”

“The overall restructured book at the end of 2QFY11 was Rs 100.3 billion (accounts of more than Rs 10 million), or 5.4% of the loan book. In 2QFY11, Rs 2.4 billion of restructured loans slipped as NPA. The bank restructured loans worth Rs 3.5 billion in the quarter and Rs 4.4 billion was repaid. Cumulatively restructured loans of Rs 19.2 billion slipped into NPA or ~19% of the restructured book. This is the highest among its peers. We are modeling for a slippage ratio of 1.8% in FY11 and 1.7% in FY12. We model credit cost of 60bp in FY11 and FY12. With higher upgrades and recovery, the management expects to contain gross NPA in absolute terms at FY10 levels.”

“Improvement in asset quality will be a key factor in BOI’s FY11 performance. In FY10 higher slippages kept NIMs subdued and resulted in higher credit costs. Improvement in asset quality (lower slippages and upgrade) was positive in 1QFY11, high slippages and low recoveries in 2QFY11 will create an overhang on the stock. We expect BoI to post EPS of Rs 56 in FY11 and Rs 69 in FY12. FY11 BV will be Rs 288 and Rs 343 in FY12. The stock trades at a P/E of 7.8x FY12E EPS and P/BV of 1.6x FY12E BV. We maintain Buy with a target price of Rs 582 (1.7x PBV FY12E),” says Motilal Oswal research report.

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