Bank of India -- Buy

Fresh investments can be considered in Bank of India stock as it has continued to deliver better-than-expected earnings growth on a consistent basis.

Its superior return ratios (Return on Assets of 1.52 per cent and Return on Equity of 30.1 per cent), efficient operations due to controlled costs, diversified-high quality loan book and sustainable growth in its core operating revenues are the key positives for the bank. At current market price of Rs 230, the stock is trading at 4.1 times its trailing one year earnings and 1.1 times its December 2008 book value. Though profit growth may moderate from current levels, it is likely to remain well above peers in PSU space.

In the nine months ended December 2008, Bank of India posted a 75 per cent profit growth. The bank’s global advances have grown at 31 per cent while global deposits grew at 26 per cent year-on-year. Advances growth was driven by growth in corporate advances (72 per cent), even as retail credit stayed almost flat. The bank has a high credit-deposit ratio which boosted growth in net interest income to 40 per cent.

Net Interest Margin for first 9 months improved to 3.14 per cent from 2.97 per cent, due to a higher yield on advances. Going forward, as the bank trims lending rates, margins may moderate from this level. However, the fall may be contained as recent relaxations in CRR, SLR and repo rates bring down the cost of deposits.

On the cost side, employee expenses and provisions have risen as the AS-15 transition liability carries higher costs due to a fall in discount rates. But complete rollout of the Core Banking Solution, may help offset this over the next year.

While treasury gains aided profits this quarter, mark-to-market provision on overseas credit linked notes, higher taxes and provision for NPAs partially offset this. If not for these provisions, net profit would have grown at a higher rate. Asset quality, a key concern surrounding bank stocks, improved year-on-year, but showed slippage sequentially. The net NPA/advances for the bank has increased from 0.48 per cent to 0.52 per cent, but remains at manageable levels. The loan book is divided into Corporate (48 per cent), SME (21 per cent), retail (17 per cent), Agriculture (14 per cent).

Going forward, apart from its diversified loan book and focus on corporate advances, a high provision cover of 77 per cent will also shield asset quality.

The concerns over the service tax on deposit insurance premium appear to be overdone as the bank may take a hit of around 6 per cent of current quarter profit in worst case scenario (assuming all its deposits are below Rs 1 lakh).

( source -- hindubusinessline )