Higher Staff Costs Impact Profits
Bank of India (BOI) reported net profit of Rs 4.9 bn, which was below our expectations, led by higher staff cost provisions. Core interest income grew by 49% YoY, driven by 27% advances growth and 37 bps YoY increase in margins. Margins, however, declined on a sequential basis by 15 bps to 2.94% due to increased cost of deposits and decrease in CASA ratio. Core fee income growth impressed with a 46% YoY increase, while treasury gains posted a decline. Higher provisioning towards pension and enhanced gratuity led to increased staff costs. Asset quality marginally deteriorated with Gross NPAs rising by 6% QoQ.
YTD highlights (if applicable)
- Strong overseas lending: Overall loan growth was driven primarily by overseas lending (up 44% YoY and contributes ~23% to total book), while domestic retail growth remained sluggish (up 6% YoY).
- Higher pension costs: During FY11, BOI charged Rs 7 bn for 100% pension liability (2nd option) towards retired staff and Rs 4.4 bn for 1/5th pension liability (2nd option) towards existing staff. Further, Rs 1.2 bn and Rs 858 mn were charged towards 1/5th of transitional liability (AS 15) and enhanced gratuity respectively.
- Gross NPAs rose due to higher slippages (slippage ratio at ~2% vs. ~1% in Q3FY11). Lower NPA provisioning, however, led to 26% QoQ rise in net NPAs. Coverage ratio declined by 2% to ~72%.
Maintain HOLD with a revised TP of Rs 456
Overall business growth remained strong, with deposit growth (up 30% YoY) coming ahead of advances growth (up 26% YoY). However, the bottom-line remained muted due to increased staff expenses and higher delinquencies. At CMP of Rs 422, the stock is trading at 9x FY12E EPS of Rs 48 and 1.3x FY12E ABV of Rs 326. We have reduced our target P/ABV multiple to 1.4x (from 1.5x earlier) on the back of lower CASA, concerns arising out of higher slippages and return ratios being under pressure. We have a HOLD rating with a TP of Rs 456 (1.4x FY12E ABV and 10x FY12E earnings).
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