Bank of India's Q2FY20 results (Underperformer) - Better than expected but stress remains high. Bank does not have a CEO

Q2FY20 results highlights

Bank of India announced PAT of Rs2.7bn versus our and street expectation of a loss. The beat was on account of higher than expected loan yields. Loan growth remains weak and stress continues to be high. The bank has not shifted to the new tax rate.

Slippage declined to 32bn from 36bn qoq. Recoveries were lower qoq but the bank wrote-off loans of Rs25bn versus Rs7bn qoq. GNPAs declined marginally by 1% qoq due to the high write-off and stood at 16.3% of loans versus16.5% qoq. Total stress loans for BoI remain uncomfortably high at 23.7% in 2Q versus 22.7% in 1Q. PCR declined to 68% from 68.9% qoq. SMA2 loans rose sharply qoq from 56bn to 106bn. Mgmt explained that the sharp rise in SMA2 was on account of three loans – DHFL of Rs40bn, Air India of Rs40bn and a government guaranteed account of Rs30bn. Air India and the government guaranteed loan will regularize soon. Mgmt also explained that their bad loan recovery expectation of Rs24bn in 2Q did not come through but would come through in 2H.

Loan growth remained subdued with loans declining 2% yoy. However both domestic and overseas NIM improved. Total NIM improved 32bps qoq to 2.99%. NIM improvement was driven by an increase in yield on loans that jumped sharply by 51bps qoq. NII grew 32% yoy and 11% qoq. Non-interest income grew 38% yoy and 11% qoq. Opex grew 18% yoy and 13% qoq. Core operating profit grew 27% yoy and 11% qoq. 

Account-wise details: The bank has signed ICA for 20 accounts totalling to Rs150bn of which 5 are standard and in the SMA category. The standard accounts include: Reliance Commercial, Religare Finvest and DHFL (both bonds and loans). Total NBFC exposure is Rs430bn which includes PSU NBFCs. Exposure to SREI is Rs13bn and is standard. Exposure to Indiabulls Housing is 35bn. Exposure to the Essel groups is Rs3.9bn and is part of SMA2. Exposure to ADAG is Rs20bn of which only Rs4.4bn of Reliance Commercial is standard. The rest is NPL. The bank expects recovery of Rs12bn from power accounts under Samadhan. Total Mudra loans are Rs120bn of which Shishu loans are Rs8.5bn. NPLs on Shishu loans are high at 15% while NPLs in other Mudra loans are lower at 10-12%.

Valuation and view

While BoI’s results were better than expected, the earnings rebound was on a low base. Return ratios and loan growth remain weak, while stress loans remain uncomfortably high. We maintain Underperformer and TP of Rs60.  The bank does not have a CEO.