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Spark Capital: Bank of India 1QFY14 result review - Capital constraint compounds asset quality concerns: Maintain SELL




Spark Capital Advisors(India) Private Limited


31 Jul 2013





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Bank of India 1QFY14 result review - Capital constraint compounds asset quality concerns: Maintain SELL Bank of India’s (BOI) 1QFY14 numbers continued to witness asset quality deterioration, with slippages of 2.7% (annualized), accentuated by incremental restructuring of Rs. 7.6bn; although stressed asset formation trended downwards from 5.5% in 4QFY13, a pipeline of Rs. 25bn of stressed asset formation for 2QFY14, coupled with high incremental exposures to risky sectors provides no comfort on asset quality. Despite a capital infusion of Rs. 8bn in 4QFY13, core T1 capital stands at 7.5%, necessitating further infusion of capital in FY14; an estimated infusion of Rs. 15bn would result in a 6% hit to ABV, additionally only improve core tier 1 capital to 8.1%, thereby requiring periodic infusions of capital as the transition to BASEL 3 begins (refer our note “Heads I win; Tails, you lose” dated Sep 07, 2012). BOI’s YTD credit growth has been led by sectors such as infrastructure, metals, textiles and jewellery (which together accounted for 65% of FY13 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 ~40%, 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. We also view the 6% qoq growth in advances with some trepidation, given that corporate loans accounted for 62% of incremental 1QFY14 loan growth. In addition, further headwinds lurk in the form of a wage revision and higher pension liabilities post the RBI standardizing actuarial assumptions. With the bank struggling on multiple components of the Growth-Profitability-Asset Quality-Capital Adequacy equation, we retain our SELL rating with a target price of Rs. 144 valuing the bank at 0.7x our stress case FY14E ABV.

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