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Muted growth due to rising NPAs

BOI is one of the largest Indian banks with strong domestic presence spanning 5,107 branches. The bank also has a significant international presence with a network of 23 branches across 18 countries.

* Q4FY21 Net interest income shrunk 22.6% YoY, with domestic NIM contracting 102bps YoY to 2.16%

* Pre-provision operating profit fell 21.0% YoY while PAT reached Rs. 250cr, owing to lower provisioning in the quarter.

* We expect the credit costs and NIM margins to worsen on account of weak asset quality (particularly from stressed MSME segment). If Stimulus from government is announced, then it may act as turnaround catalyst for growth in loan book. However given current uncertainties, we downgrade rating on the stock to REDUCE with rolled forward price target of Rs. 71 based on 0.42x FY23E BVPS.

Lower provisioning helps maintain profitability

For Q4FY21, Net interest income subsided to Rs. 2,936cr (-22.6% YoY) with domestic NIM contracting 102bps YoY to 2.16%. For FY2021, domestic yield on advances dropped 118bps YoY to 8.15%, offsetting the benefit from reduction in cost of deposits of 53bps YoY to 4.57%. Interest income as % of advances contracted to 1.7% in Q4FY21 (-36bps YoY). With Cost-to-income ratio worsening to 58.0% (vs 51.6% in Q4FY20), Pre-provision Operating profit registered 21.0% YoY decline to Rs. 2,094cr. Provisions reduced considerably this quarter to Rs. 1,831cr (-77.5% YoY). GNPA/NNPA stood at 13.77%/3.35% with 52bps/89bps QoQ deterioration, due to higher slippages recorded this quarter. Resultantly, Net profit came in at Rs. 250cr (vs. Rs. 3,571cr loss in Q4FY20).

Adequate capital reserved for asset quality concerns

Deposits moderately improved 2.5% QoQ while Borrowings shrunk 12.7% QoQ. CASA ratio remained low at 41.27%. Domestic advances inched down to Rs. 362,361cr (-0.2% QoQ) with NPA exposure rising in high risk MSME sector (18.7% of domestic advances) and Retail (3.8% of domestic credit). Low credit costs of 1.78% is unlikely to be sustainable as the credit risk in the market has risen. CARR ratio stood healthy at 14.93% (vs 12.51% in Q3FY21).

Key call highlights

* Rs. 2,100cr of NPAs has already been recovered for Q1FY22. Recovery target is of Rs. 8,000cr. Collection efficiency is 90-91%

* Restructured loans stands at around Rs. 4,428cr (of which Rs. 3,449cr in MSME, Rs. 738cr in Personal loan and Rs. 640cr in Corporate credit). Loans disbursed under ECLGS scheme was Rs. 4,700cr

Outlook & Valuation

We expect the credit costs and NIM margins to worsen on account of weak asset quality (particularly from stressed MSME segment). An announcement of government stimulus may act as turnaround catalyst for growth in loan book. Given uncertainties, we downgrade our rating on the stock to REDUCE with rolled forward price target of Rs. 71 based on 0.42x FY23E BVPS.

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