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Investment Rationale:
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.
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