Bank of India

Profile

Like all PSU banks the stress at Bank of India (BOI) also has been towards the retail sector and as a result the share of bulk deposits or corporate deposits is just 20 per cent, while rest is all retail deposits. International business of the bank contributes 17 per cent of the total business.
Current Account and Savings Account (CASA) ratio as of March 31, 2009 stood at 31 per cent, down from 40 per cent 2 years ago, which implies that the higher interest offered during the credit crisis has worked for the bank, and most of the new funds have gone into term deposits.
Currently, the bank is looking for partners for its venture into the asset management business.

Fundamental Performance

The bank has, over the years, done well to cut down on high non-performing assets (NPAs) of yesteryears. Its current net NPAs stand at 0.44 per cent of the total assets while its capital adequacy ratio stands at 13.01 per cent, up from 11.75 per cent 2 years ago. On the profitability front, it has also improved upon its wayward ways —for the past three years, the bank has been able to boost its bottom-line by 62.45 per cent annually.
Though its dividend payout ratio is not something to brag about, still BOI has been a regular dividend paying company for the past 10 years.

Stock Performance

The believer of this bank’s stock has been rewarded handsomely over the past 5 years. The stock has compounded the investors money at more than 50 per cent per year.
Currently, the stock is trading at a dividend yield of 2.03 per cent, well above its 5-year median yield of 1.71. BOI is about 1/4th the size of the PSU banking giant State Bank of India (SBI), but valuation-wise the stock is trading at a 50 per cent discount to SBI. Its price to earning (PE) ratio is 6.84 while that of SBI is 13. But comparing this with the stock’s own historic level, it is currently trading at 21 per cent below its 5-year median PE.

History

Bank of India was set up in 1906 in Mumbai. Starting off with a single branch, it now has over 3,000 branches all across India. It was nationalised in 1969.

Bank of Baroda

Bank of Baroda is likely to emerge as a much stronger player. Investors can invest in the stock with a long-term perspective

Beta: 1.06
Institutional holding: 38.0%
Current dividend yield: 2.9%
Current P/E: 6.5
Current m-cap: Rs 10,035.6 cr

WITH A network of over 2,800 branches across the country, Bank of Baroda (BoB) is one of the largest public sector banks in India. The bank has been growing rapidly in the last few years, and it closed FY '08 with 46 branches in abroad—a mark that very few banks have achieved. BoB's wide base has helped it to tap all the resources-in rural, semi urban and the metro markets-to grow its balance sheet and revenues. BoB's international advances grew by more than 30% in FY '08, as a result of its wide presence in overseas markets.

BUSINESS

BoB's balance sheet has grown at a compounded average growth rate (CAGR) of 25.9% per annum in '06-'08. And, in terms of the growth trajectory, BoB has joined the fray of the top PSU banks, like, Punjab National Bank (PNB) and Bank of India (BoI).

The turnaround actually started becoming visible in the FY '06, when for the first time in the current decade the balance sheet expanded by close to 20%. Since, FY '06, the bank's loan book has been increasing at a rate in excess of 25%, but the deposits have been growing at a bit slower rate. This has helped it in improving the credit-deposit ratio i.e. a higher portion of deposits is extended as advances.

However, BoB's net interest margin (NIM) has been under pressure as it has come down from 3.4% in FY '05 to 2.9% in FY '08. One may get an impression that this has happened because the bank has not been able to pass on the increase in cost of deposit to its customers. However, this is because the bank had to step up its deposit mobilisation in the last two years in order to maintain high credit growth. This resulted in higher interest payments on account of higher deposits, thereby, compressing the net interest income, which ultimately led to fall in NIM. This shows that there was a trade off between BoB's shrinking NIM and growth in its advances. And, it has paid off, as the bank's profit grew at a CAGR of 30.8% in last three financial years.

The non-interest part of BoB's revenue has not been growing as fast as the fund-based revenue. The bank needs to improve its performance on this parameter. In the six months ending September '08, the bank's profit has grown by 16.5% on a year-on-year basis, propelled by 32.5% growth in its advances. It must be noted that the growth in advances took place in a sluggish business environment.

The NIM was also under pressure in the first half of the current financial period. This is visible as the interest expenses grew by a higher percentage than interest income. However, BoB rationalised its other expenses, and this helped in boosting its profit growth.

The asset quality is very high as the net NPAs formed just 0.43% of net advances at the end of September '08 quarter and on this count the bank's performance is as good as a top private bank. Its capital adequacy ratio stands at 13% and it shows that it is well capitalised.

VALUATION

The stock is trading at a multiple of 6.5 times the trailing twelve months' earnings. The low valuations do not justify the earnings growth, which is much higher. Moreover, the stock is trading at a discount to its book value (Rs 301 per share). A fundamentally sound stock, trading at less than its book value, is often the first to rise when the market starts moving up. Investors are advised to invest in the stock with long-term horizon.

Angel Broking views on Bank stocks - Punjab National Bank, Union Bank, Oriental Bank of Commerce, Bank Of India

Union Bank - Target of Rs 194


Angel Broking has recommended a buy rating Union Bank of India with a target of Rs 194 in its November 21, 2008 research report. "We believe UNBK is amongst the more profitable, efficient and competitive PSU Banks. We have a positive outlook on the bank due to traction in CASA deposit growth driven by large branch expansion plans as well as cost-efficient operations. We expect the Bank to deliver 12% CAGR in Net Profit and 24% RoE over FY2008-10E."


"At Rs 144, the stock is trading at 4.2x FY2010E EPS of Rs 34.3 and 0.9x FY2010E ABV of Rs 161.9. The stock has been trading at a median one-year forward P/ABV multiple of 1.1x since April 2002. We value the stock at 1.2x FY2010E ABV to arrive at a 12-month Target Price of Rs 194, implying an upside of 35%. We recommend a Buy on the stock," says Angel Broking's research report.


PNB - Target of Rs 625


Angel Broking has recommended a buy rating on Punjab National Bank (PNB) with a target of Rs 625 in its November 21, 2008 research report. "We believe PNB is amongst the more profitable and competitive PSBs, with relatively moderate Earnings growth and strong RoE prospects. We have a positive outlook on the Bank due to its superior CASA ratio and high core income component in Earnings, tempered by relatively moderate growth momentum. We expect the bank to deliver about 21% RoE over FY2008-10E and maintain high RoEs relative to peers over the longer term as well, underpinning higher valuation multiples."


"At Rs 451, the stock is trading at 4.9x FY2010E EPS of Rs 92.5 and 0.9x FY2010E Adjusted Book Value (ABV) of Rs 480.4. We value the stock at 1.3x FY2010E ABV to arrive at a 12-month Target Price of Rs 625,implying an upside of 39%. We recommend a Buy on the stock," says Angel Broking's research report.


Bank Of India - Target of Rs 317


Angel Broking has recommended a buy rating on Bank Of India with a target price of Rs 317 in its November 21, 2008 research report. "We are positive on Bank of India (BOI) due to its balanced funding mix, moderate operating costs, efficient capital management and high core fee income. Consistent improvement in operating leverage and relatively higher resilience in NIMs have led to improvement in core RoE. Hence, we value the stock at 1.3x FY2010E ABV (above its median P/ABV of 1.0x since April 2002) to arrive at a 12-month target price of Rs 317. We recommend a Buy on the stock," says Angel's research report.



Oriental Bank - Target of Rs 192


Angel Broking has recommended a buy rating on Oriental Bank of Commerce with a 12-month target price of Rs 192 in its November 21, 2008 research report. "Oriental Bank of Commerce's (OBC) sustainable RoAs are low on account of its weak Deposit mix and low Fee income. On account of reduced sustainable RoAs due to substantial NIM compression and moderate growth outlook on NII and Fee Income front, we value the stock at 0.7x FY2010E ABV, below the median one-year forward P/ABV multiple of 1.1x at which it has traded since April 2002."


"Nonetheless, at Rs 137, the stock is trading at cheap valuations of 3.9x FY2010E EPS of Rs 35.7 and 0.5x FY2010E Adjusted Book Value (ABV) of Rs 273.7. Hence, we recommend a Buy on the stock, with a 12-month Target Price of Rs 192, translating into an upside of 39%," says Angel Broking's research report.

Arihant Capital Markets Views on Smallcap Banking Sector

INDIAN BANK

Although the banking sector has seen huge corrections in the market but Indian Bank remains one of the shining stars in the small cap space. A healthy level of CASA ratio reflects that the bank is less dependent on bulk deposits and has a high fee based income. The bank also has a healthy NIM of 3.2% and low level of net non performing assets.

Bank Of India

Bank Of India (BOI) has become a good bet among the PSU Banks. The bank has a sound balance sheet, and a good CASA ratio of 34%. Even the FII holdings are very low., just around 16%. Bank of India’s growth in aggregate business is reflected in its healthy NIM of 3.3%. The net non performing assets also stand at just 0.52%.