Why Morgan Stanley Sees 50% Upside For Bank Of India

Morgan Stanley upgraded Bank of India to 'overweight' on Friday after the lender reported strong numbers in the July-September quarter. It also raised the price target to Rs 95 a share from Rs 53 earlier.

While Bank of India reported a net profit of Rs 960 crore, which was down 8.6% year-on-year, net interest income rose 44% from last year to Rs 5,083 crore. Net interest margin too improved by about 49 basis points sequentially to 3.04%.

The fall in net profit was largely due to one-time provision of Rs 470 crore made toward bad loan divergence. Typically when a bank's assessment of its bad loans undershoots the Reserve Bank of India's own assessment, the lender is expected to make additional provisions toward this divergence.

Adjusting for this divergence, Bank of India's profit before tax was 11% higher than Morgan Stanley's estimates, it said. The brokerage raised its earning estimates by 33% for FY23 and 22% for FY24.

"We expect RoAs (return on assets) of 0.7% for FY24 and 0.8% for FY25, driving RoE (return on equity) of 10% and 11% for the respective years," Morgan Stanley said in its report.

The stock has lagged, as it was up just 2% on a one year basis, and is cheap at 0.4 times FY24 book, the brokerage said. In the next few quarters, Bank of India would benefit from a host of factors, Morgan Stanley said.

• Margins likely to improve further as the loan book is yet to get the full benefit of the changing rate cycle.

• The bank has a liquidity coverage ratio of 160-180%, much higher than the average 120-150% for state-owned banks. This will further boost margins as lending picks up.

• The bank's strong Tier-1 capital adequacy ratio of 13.38% gives it a strong runway to support growth, compared with the average 11.4% for most state-owned lenders covered by Morgan Stanley.

• Higher provision coverage ratio than most public sector banks under the brokerage's assessment.

Key risks include weaker-than-expected margin progression and potential dilution as government shareholding needs to be reduced from the current 81%, Morgan Stanley said.

On Friday, Bank of India shares rose as much 6.25% to Rs 68 apiece before shedding some of the gains to end the day 4.61% higher at Rs 66.95.