Bank of India's Q4FY19 results (Underperformer) - A strong rebound, but sustainability is key

Q4FY19 results highlights

• BOI reported PAT of Rs2.5bn versus our expectation of a loss. The bank had made a loss yoy and qoq. Earnings rebounded (off a weak base) with a strong sequential pick-up in margins, sharp decline in credit cost and qoq decline in slippage. Most importantly, CETI improved to 11% from 9.1% qoq and is now higher than SBI’s and YES Bank’s due to the huge capital infusion from the government. The bank had a provisioning divergence of Rs14bn for FY18.
• Slippage of Rs31bn declined from Rs43bn qoq but remains high at 3.6% of lagged loans.  GNPAs remained flat qoq and remain high at 15.8% of loans. The bank holds 100% PCR on NCLT accounts.  
• Loans growth remained weak with loans remaining flat qoq and declining 3% yoy. Domestic loan growth accelerated growing 12% yoy and 5% qoq but foreign loans declined sharply.
• NIM expanded 38bp qoq to 2.93%. Due to higher NIM, NII grew 58% yoy and 22% qoq though loan growth was flat.
• Fees remained flat yoy but grew 17% qoq due to seasonality. Non-interest income grew 17% yoy and 4% qoq.
• Employee expenses rose sharply by 33% yoy and 35% qoq due to wage revision, pension and ESOP charges.
• Core operating profit declined 2% qoq but grew 79% yoy on a low base.
• Provisions for NPAs declined sharply from Rs92bn to 15bn qoq. PCR improved marginally to 68.5% from 68% qoq
• CET1 improved to 11% from 9.1%. There was a government capital infusion of Rs100bn in 4Q19 and an additional Rs46bn in 1Q20. The bank also revalued property adding Rs6.8bn to revaluation reserves which can be included in CET1 at a discount of 55%.The bank raised Rs6.6bn through an ESOP scheme.

Valuation and view:

While BoI’s results were much better than expected, the earnings rebound was on a low base. Return ratios and loan growth remain weak. As such we maintain Underperform. We review earnings. We roll over base to FY21 but cut target multiple to 0.4x from 0.6x as we do not see any core competency in the bank despite a strong quarter. Our new TP is Rs70.