Bank of India

 

 

Despite some moderation in growth of late, Bank of India is still a robust bank. The current fall in stock price provides an opportunity for long-term investors to enter

   BANK of India is one of the largest state-owned banks in the country. It is the third-largest public sector bank in terms of market capitalisation. Till the end of FY 09, it was one of the fastest growing banks in the country. However, in September '09 quarter its performance slipped, as its profit fell by 58% year-on-year in the quarter. Due to which the stock underperformed the banking indices. We think that it provides a good opportunity for long-term investors at current levels.

PERFORMANCE:

Much like other public sector banks (PSBs), Bank of India (BoI) embarked on a high growth trajectory from FY 05. However, it grew at a much faster pace than other PSBs. For instance, BoI's profit grew at an average rate of 63% per annum from FY 07 to FY 09. This shows that the bank had actually grown at a faster pace than the fast paced private sector banks like ICICI Bank and HDFC Bank.

   Moreover, the bank didn't sacrifice on quality. For instance, its net interest margin (NIM) remained in the vicinity of 3% from FY 07 to FY 09. NIM is a measure of spread between yield on advances and cost of deposits and 3% NIM is a considered as a benchmark in banking industry. Similarly, its asset quality was very high. On an average net non-performing assets (NPAs) formed just 0.6% of net advances in the same period. Its return on assets (RoA) stood at 1.5% in FY 09 compared to the average 1% posted by listed banks in India. Even in terms of productivity, the bank featured among the top. Its business per employee stood at Rs 8.3 crore in FY 09, which was higher than what was reported by its peers like State Bank of India, Punjab National Bank and Union Bank of India. In fact, in a recent study done, BoI came out to be the second-best listed bank in the country.

   In the current financial year, the bank faced headwinds in the form of compressing NIM, rising NPAs due to which the profit fell down by 31% in the six months ending Sep '09. The bank's NIM fell from 3.2% in Sep '08 quarter to 2.6% in Sep '09 quarter.

   Its net NPA rose from 0.5% of net advances in Sep '08 quarter to 1.1% in Sep '09 quarter. However, it seems that worst is over as the bank's NIM had actually improved by 15 basis points in Sep '09 quarter compared to June '09 quarter. The bank's NIM had fallen due to monetary tightening in the second half of previous fiscal which sent the interest cost soaring. Consequently, banks had to raise funds at a much higher rate, which had resulted in lower NIM. Banks have started retiring high cost deposits in the first half of current fiscal itself. Therefore, it seems that BoI will report healthier NIM going forward. On other parameters its performance was stable. For instance, its loan book grew by 16.2% in Sep '09 quarter, which is at par with growth at industry's level.

VALUATION:

The stock price has fallen as a result of weak results posted in Sep '09 quarter. Its stock made an all time high, as it reached Rs 475 per share on October 17 this year. However, it has lost 20% since then. As of now, the stock is trading at a price to book value (P/BV) ratio of 1.7 times. Its peers including Bank of Baroda, Punjab National Bank and Union Bank of India are trading at an average P/BV of 1.9 times. This shows that the bank's stock is trading at a discount to its peers.

   Moreover, at current price, it is giving a dividend yield of 2.1%. We believe that BoI's current price provides an opportunity for longterm investors to enter, as it's seldom that a robust and efficient bank like BoI trades at a discount to its peers.