Recommendation: Buy

Current price: Rs 276 (at the time of publishing this tip)

Price target: Rs 365

Key points:

• The asset quality of Bank of India has shown a marked improvement in relative as well as absolute terms over the past few years. However, a 112% growth (on a compounded basis) in the loans subject to restructuring during the period FY2006-08 (171% on a yoy basis in FY2008) signifies strain on the asset quality of the bank. Though the bank’s exposure to sensitive sectors like capital markets and real estate has declined yoy in relative terms, in absolute terms the bank’s exposure to real estate sector has increased by 29.9% yoy, which is a cause for concern.
• In FY2008, the bank witnessed a significant 66.3% increase in its off balance sheet exposure. The bank’s liability on account of forward exchange contracts almost doubled during FY2008. This constitutes around 60% of the contingent liabilities and pushed up the bank’s off balance sheet exposure considerably. The international business of the bank witnessed a slower growth in its assets as compared with the growth seen in the previous fiscal. During FY2008, the bank’s international assets grew by ~5% yoy vs 41% growth seen in FY2007. This led to an overall growth of 26.3% in the bank’s global assets. Considering the current condition of the global financial markets and the slowing credit demand at home, the growth in the bank’s international business would be a crucial factor to watch out for.
• During FY2008, the bank took several initiatives to shore up its capital adequacy due to which as on March 31, 2008 its capital adequacy ratio under Basel II norms stood at 12.04% (with the tier I capital at 7.70% and the tier II capital at 4.34%). In terms of credit growth, the bank has outperformed the industry in the past few years. A similar growth trend continued in the first quarter of the current fiscal, when the bank registered a growth of 38.8% in its advances compared with a 26.2% growth in industry advances. With the bank now being adequately capitalised, it is well poised to expand its business domestically as well as globally.
• The management is positive about the future growth prospects of the bank, however it raised concerns over certain issues due to which it believes the environment for growth would remain challenging in the coming years.
• At the current market price of Rs 276, the stock trades at 5.7x EPS for 2009E, 3.3x 2009E pre-provisioning profit and 1.2x 2009E price-adjusted book value.
• I maintain Buy recommendation on the stock with a price target of Rs 365 over next 3-6 months horizon.