Size, branch reach make Bank of India an attractive privatisation candidate

First to exit PCA in 2019, the bank's efforts to better its asset quality is yielding results

Ever since the Union Budget, stocks of public sector banks (PSBs) have witnessed a huge rally, thanks to the indication that two such lenders were headed for privatisation.

Names doing the rounds for the privatisation include Bank of Maharashtra, Indian Overseas Bank, Central Bank of India, UCO Bank, and Bank of India (BoI). Their share prices were up 8-20 per cent on Wednesday, with BoI being the top gainer in the Nifty PSU Bank index.

While Bank of Maharashtra fares better than the rest on parameters, such as growth and asset quality, its fairly localised presence — restricted to Maharashtra — may be a dampener for an investor.

Purely from that context, BoI, which has most branch presence among the above-mentioned names with a pan-India reckoning, makes it a better candidate. Also, headquartered in Mumbai, BoI doesn’t have its roots tied to any community, unlike other privatisation candidates. 

Ajay Bodke, an independent market analyst, believes investors, too, may prefer a bank “which won’t raise the hackles of a province or community”. Further, he says based on news reports, so far, it is unlikely that a small-sized bank or one which is still under the central bank’s prompt corrective action (PCA) will be chosen for privatisation. BoI fits the scale on these parameters, too. 

Its loan book at Rs 3.94 trillion is also larger than other potential divestment names.

Among the first to exit PCA in February 2019, BoI has significantly reduced its gross non-performing assets (NPA) from 16.3 per cent in Q3FY20 to 13.3 per cent in December 2020 quarter (Q3). Its net NPA ratio has fallen to 2.5 per cent from 6 per cent during this period. The slippages ratio, too, has eased from 11 per cent, the peak in FY18, to 4.2 per cent in Q3. Analysts at Narnolia Financial Advisors, however, believe the run-rate may stay at over 4 per cent in FY22. Top six PSBs have guided for the ratio to reduce to 2-2.5 per cent in FY22. 

At 86 per cent provisioning coverage ratio in Q3, the bank has fully covered for likely NPAs without considering the Supreme Court’s standstill order; much of its legacy loans appear to be taken care. However, analysts at Sharekhan who have ‘hold’ recommendation on the BoI stock note that the risk of further NPA cropping up appears likely.

The head of an investor company, which had recently participated in a PSB’s fundraise, states: “Weak asset quality is a problem for most PSU Banks. That’s not the deciding factor for an investor keen on picking assets through divestment. Branch strength, presence and cross-section of borrowers hold the key.” 

With over 5,000 branches, and 30 per cent concentration in western India, BoI scores on this front, too. Whether BoI makes the cut will be known in the coming months.