Bank of India (BoI) posted a net profit of Rs 323 crore, nearly 58% lower y-o-y. The bank was hit by a steep 110% y-o-y increase in provisioning, primarily on account of its deteriorating asset quality. Net interest income grew by a subdued 3% y-o-y in sharp contrast to peers like Punjab National Bank (PNB) and Bank of Baroda (BoB), which have seen strong NII growth over 20% in this period.
There has been some moderation in advances growth at 16.18% over Q2 FY09 with domestic growth spurring growth rates at 19% while overseas advances saw a slower 13% rise. Deposit growth rate was over 20% and low cost CASA deposits made up about 32% of total deposits, a sequential improvement of 29 bps in this quarter.
Although the bank has seen some margin relief as high cost deposits matured (about 20bps y-o-y), the near 200bps dip in yield on advances in this period has pushed net interest margins down 63 bps to about 2.57.
Non interest income growth also was weak this quarter, up 4% y-o-y with sharp dip in fee income compensated by treasury gains and foreign exchange income. After adjusting for employee wage hike-related and (Accounting Standards) AS-15 liability provisioning, core operating profits dipped 2% y-o-y.
Loan loss concerns
Asset quality was the key disappointment with higher domestic slippages pushing up gross non performing asset ratios to 2.67% of total advances from 1.53% in Q2FY09 and up 72 bps q-o-q. This sequential jump in the GNPA can primarily be traced to Rs725 crore worth of restructured assets turning bad during the quarter, according to a Sharekhan report, mainly from the pharmaceutical sector. About 9.4% of restructured assets have slipped into non-performing category, it adds. Management expects additional slippages of Rs1, 000 crore in the next two quarters, totaling 21% of the restructured assets.
The low loan-loss provisioning coverage (59.06% as compared to nearly 81% last year) is another concern in the light of the RBI pushing for provisioning of at least 70% by September 2010. The need to reach the proposed 70% coverage level would mean a significant pressure on the profitability of the bank, observes Sharekhan research. The bank could see a 5.9% impact to FY11 earnings and 2.1% to BV as per Citigroup research estimates.
Its capital adequacy ratio is 13.52% versus a mandatory 12% with a Tier-I ratio of 9.15 %. This is a relatively thin cushion for future growth compared to rivals and a Tier-II fund-raising is imminent according to Sharekhan.
BoI closed at Rs 333.60 down 6.76% on 30 Oct 2009. At this price, it is trading at a P/B of 1.24 x and a P/E ratio of 5.8 x consensus adjusted FY11 book value per share and EPS estimates.
