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Spark Capital: Q3FY13 Result Reviews of Bank of India




Spark Capital Advisors(India) Private Limited


30 Jan 2013





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Bank of India - Asset quality deterioration continues, no turnaround in sight : Maintain SELL Bank of India’s (BOI) 3QFY13 result continued to witness asset quality deterioration, with a moderation in slippages to 2% (annualized) being nullified by incremental restructuring of Rs. 22bn; effectively slippages inclusive of incremental restructuring works out to 5.2% annualized – the same as 2QFY13. BOI’s quantum of restructuring implies a 10% hit to FY14E PAT if the Mahapatra committee’s recommendations are implemented- a key risk in our view. With core T1 capital below 8%, a further infusion of capital is on the cards; although infusion at current market prices would mean no negative impact to current ABV estimates, an estimated infusion of Rs. 10bn would only improve tier 1 capital to 8.6%, thereby requiring periodic infusions of capital. (refer our note “Heads I win; Tails, you lose” dated Sep 07, 2012). We also remain wary of the SEB book of Rs. 65bn, of which only 50% has been restructured, on which we believe a NPV hit is likely. BOI’s YTD credit growth has been led by sectors such as infrastructure, metals and jewellery (which together accounted for 62% of YTD industrial advances) while exposure to risky sectors currently stands at 24% up from 21.5% a year ago - with infrastructure alone rising to 11.4% of advances (9.6% in 1QFY12). We also note that BOI’s slippages from restructuring on the FY11 book is 39%, amongst the highest in our coverage universe while 50% of the restructuring stock has been created in the last 15 months, a potential red flag for FY14 slippages. In addition, further headwinds in the form of a wage revision and higher pension liabilities lurk. Given the above, we retain our SELL rating with a target price of Rs. 227 valuing the bank at 1x stress case FY14E ABV.

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