Research Desk - Bank of India

Bank of India
Q3 FY07
Result Update

Profit growth was not only above expectation, but was qualitatively better as well. Bank managed 16bps margin expansion on an expanded loan book of 28%. BOI’s growth story of recovering asset quality along with improving loan mix leading to margin expansion is playing out well. Despite factoring in an equity dilution of 20%, we expect ROE to remain around 19%. We rate BOI as the best play on the Indian Banking sector among the PSU banks. We reiterate our positive stance on the stock with a BUY rating and a price target of Rs268, implying an upside potential of 31%

Rapid asset growth, though managed well through rising CASA ratio
Digressing from its guidance of 24-25% loan growth, bank grew its loan book by 28%, aided mainly by the retail segment (55% growth yoy). However, this was managed well through higher CASA mobilization, which grew by 22% yoy to 41.3% up from 40.4% in Q2 FY07.

Rising share of retail loan book now forming 32.3% from 27% in Q3 FY06, along with improving mix of international loan book expanded yields by 78bps yoy to 8.4%. Funding cost also remained under control with rising CASA ratio, restricting deposit cost rise to 30bps yoy to 4.4%. This expanded margins by 16bps yoy to 3.2%, while domestic NIMs expanded by a huge 21bps to 3.8%.

BOI’s main investment theme of improving asset quality continued to play out well with gross NPAs coming down by Rs334mn qoq to Rs21.8bn, while net NPAs fell by Rs404mn to Rs7.5bn. Net NPAs on a proportionate basis have come down to less than 1% from 1.1% in Q2 FY07.

We expect profit growth in Q4 FY07 to remain subdued on a high base effect. However, we expect rising ROE to continue expanding valuations for the bank. Despite factoring in a 20% equity dilution in FY08, we estimate an average ROE of 18.5% over FY08 and FY09.