Bank of India: Getting its bearings right

Decent valuations apart, improvement in operational parameters could prop Bank of India.

Bank of India is currently in the analysts’ favoured list even though its valuations look attractive. Its loan growth, in tandem with the industry average, has grown around 18 per cent. To maintain this growth level, the yield on advances has suffered. It declined 156 basis points despite cost of funds falling 128 basis points. The current account savings account (CASA) ratio, an indication of low-cost funds, increased from 30.7 per cent to 31.75 per cent on a year-on-year basis.

However, this did not support net interest margins (NIMs), which declined 41 basis points to 2.57 per cent. The cost to income ratio, a second barometer of efficient operations, jumped 742 basis points to 43.96 per cent. Net interest income grew marginally by 8 per cent to Rs 1,552 crore and other income declined 8 per cent due to lower treasury profit, in line with other banks.

But, operating expenses were up 23 per cent due to branch expenses and higher employee cost. All this led to a decline of 9 per cent in operating profit to Rs 1,275 crore. The bank disappointed heavily on the non-performing assets (NPAs) front. In absolute terms, gross NPAs doubled while net NPAs quadrupled. Thus, net profit declined heavily by 47 per cent to Rs 428 crore as provisions for NPAs doubled.

In contrast to expectations, the bank’s foreign operations, about 17 per cent of total business, fared better than Indian operations. While loan growth has been higher at 27 per cent, yield on advances and NIMs have improved 174 basis points and 38 basis points, respectively, though cost of funds has inched up 76 basis points. The asset quality has also been better as gross NPAs (in percentage terms) have slipped marginally by 15 basis points while net NPAs have declined five basis points.

The weak performance of four quarters led the bank to a disappointing end of FY10 compared to FY09. While net interest income inched up 5 per cent, operating profit and net profit declined about 14 per cent and 42 per cent, respectively, due to higher operating expenses and almost doubling of provisions. Analysts look for better operational efficiency from the bank. Any leverage here would improve its valuations, the share trades at around 1.3 times and 1.1 times its estimated adjusted book value for FY11 and FY12.