Bank of India's Q2FY18 results (Underperformer) - Slippages decline, but the bank continues to post a core loss

Q2FY18 results

• BoI reported PAT of Rs1.79bn against expectation of a loss. The beat was driven by income on IT refund to the tune of Rs.2bn, and higher trading gains that rose 15% qoq. Excluding trading gains, the bank continued to post a pre-tax loss. Core loss for 2Q18 was Rs6bn versus Rs5bn qoq and Rs12bn yoy.
• Slippages declined for a second quarter in a row leading to a 3% decline in NPLs qoq. Gross NPLs account for 12.6% of loans. Slippages declined from Rs40bn to Rs21bn moderating to 2.4% of lagged loans. However write-offs remained elevated at Rs28bn up 200% yoy / 20% qoq. Agri NPLs further rose by 7% sequentially (19% in 1Q) while retail NPLs declined 9%.
• Loan loss provisions declined 15% yoy and 13% qoq. The bank provided Rs1.9bn out of the total shortfall of Rs5.7bn on cases referred under the bankruptcy code in 2Q and the remaining Rs3.8bn will be provided in 2HFY18.
• Provisioning cover ex technical write-offs remained unchanged at 52.2%.
• SMA-2 book is large at 4.4% of total loans, also total stress loans including SDR, 5/25, S4A and SRs stand at 18.6% (Exhibit : 2)
• Loan growth was flat yoy. Retail loans grew 17% yoy. Domestic CASA declined 1% qoq but remained healthy at 39%.
• Margins improved 16 bps qoq due to interest on tax refund and lower slippages. 
• Operating expenses rose sharply qoq due to higher employee expense though yoy employee expenses continued to decline.

Valuation and view

We are factoring in government infusion of Rs45bn in line with the bank’s market share. We expect profitability to remain weak through our forecast period. With government infusion likely to facilitate higher provisioning, we increase our target multiple to 0.6x unadjusted BV. Our new TP is Rs145 and we reiterate Underperform given the weak outlook. The bank plans to sell non-core assets in 2HFY18