Bank of India - Gradual Revival In Growth, RoA; Recovery To As Catalyst: ICICI Direct
Continued healthy business growth, steady margins, moderation in credit cost is seen to aid gradual improvement in RoA in FY25E.
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ICICI Direct Report
Healthy business growth with focus on margins:
Bank of India has reported healthy revival in credit growth in FY22-23; in-line with industry. Focus on improving granularity of advances has led to rise in proportion of non-corporate loans from 51.6% in FY21 to ~55% in Q1 FY24. Going ahead, bank targets advance growth of 11- 12% in FY24-25E with continued focus on retail/ micro small medium enterprise segment, while opening of new mid-corporate branches & pipeline of Rs 40,000 crore in corporate sanctions is seen to aid traction in corporate segment.
Gross non performing asset to decline further; recovery from stressed exposure to aid earnings:
Asset quality has been on improving trend with GNPA declining from 14.8% in FY20 to 6.7% in Q1 FY24. Steady slippages (Rs 8,000 crore in FY24E) and healthy upgrades/recoveries (Rs 12,000 crore in FY24E) coupled with write-offs is expected to result in further decline in GNPA and keep credit cost benign at 60-70 bps.
Increased focus on recovery from stressed assets through opening of 18 ARBs and shifting of non performing asset account (Rs 50 lakh and above) to these ARBs remains a catalyst for higher traction in other income and thereby earnings. Additional provision requirement, on implementation of ECL guidelines, is ascertained at Rs 10,000 crore.
Focus to keep margins steady; moderation in credit cost to aid RoA:
Moderation in slippages and increase in interest rates has led to improvement in net interest margin from 2.55% in Q1 FY22 to 3.03% in Q1 FY24 (~3.23% excluding income tax refund). Focus on retail and MSME segment, repricing of marginal cost of fund based lending rate based advances (53% of loans) is expected to aid yields, while healthy liabilities with ~88% from retail deposits, huge customer base of ~11 crore is seen to enable accretion of liabilities at competitive cost thereby keeping NIM steady at ~3%.
Operational performance is expected to remain steady with recovery from stressed exposure seen to offset anticipated lower treasury income and efficiency improvement (hired a CTO and undertaken digital spends of Rs 800 crore) is expected to limit impact of wage provision, thus aiding earnings and return ratios.
Rating and target price
Continued healthy business growth, steady margins and moderation in credit cost is seen to aid gradual improvement in return on asset at 0.8% in FY25E. Recovery from stressed and written off exposure to provide boost to earnings and thus act as re-rating catalyst.
At current market price, the stock is trading 0.6 times FY25E adjusted book value which seems relatively lower. Assigning a multiple of ~0.8 times FY25E ABV, we ascribe target of Rs 117 per share and a 'Buy' rating.
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