Bank of India - strong balance sheet growth and profitability, but declining CASA
April 13, 2009 Bank of India Consolidated 5yr record shows strong Balance Sheet growth, high margins and profitability in the last couple of years. However sharp declines in low-cost CASA deposits may be of some concern, if the trend persists. 
Data, Analysis contributed by Bobby Mehrotra Want to collaborate with me and contribute towards India Stock Analysis? Strong Capital BaseA strong capital base is the number one issue to consider before investing in a lenderBank of India's Capital Adequacy ratio is at ~13 percent, much above the mandatory 9 percent requirement stipulated by RBI. Gross and Net NPAs (Non-Performing Assets) have been brought down sequentially, year on year, to comfortable levels in FY08. FY08 Gross and Net NPAs stand at 1.68% and 0.52% respectively, on par with the best in the business. Provision Coverage has also improved every year during the last 5 years, however it is still a far way off from the record of leading private banks. Return on Equity (RoE) and Return on Assets (RoA)These metrics are the defacto standards for gauging bank profitability.Bank of India's record on profitability is patchy. FY05 and FY06 were partciluarly bad years with poor Net Margins and lower asset turnover resulting in poor return on assets and return on equity. However in FY07 and FY08 Bank of India seems to have recovered impressively form this bad patch. In FY08 Net Margins touched an impressive 13% plus on the back of robust fee income and interest income growth. Asset turnover and Return on Assets have improved significantly. Despite financial leverage coming down to more conservative levels of ~17%, Bank of India maintained the high ROE of over 20% because of the significantly higher Net Margin and higher Asset Turnover. Efficiency RatioThe efficiency ratio, measures non-interest expense, or operating costs, as a percentage of income. Basically it tells you how efficiently the bank is managed. Many good banks have efficiency ratios under 55% (lower the better)Cost Efficiency ratio has seen significant improvements on a consistent basis in the last 4 years to just over 30 percent in FY08. This beats its private sector peers HDFC Bank, ICICI Bank, and even the smaller, nimbler Axis Bank handsomely and rivals the much smaller Yes Bank Net Interest Margins (NIM)Another simple measure to watch is net interest margin, which looks at net interest income as a percentage of average earning assets. Track margins over time to get a feel for the trend.Net Interest Margins have been generally stable around the 3 percent mark for the last few years. However to my surprise there is no mention of the record on Net Margins in Annual Reports for FY 2004 and FY 2005; and I failed in collecting the NIM details from any other sources -seems a bit intriguing to me! Strong RevenuesHistorically many of the best-performing bank investments have been those that have proven capable of above-average revenue growthFY08 growth has been good. Interest Income and Total Income growth stand at ~35 percent, complemented well by the strong Fee income growth at ~32 percent. The Balance sheet has also grown strongly with Advances growing at ~34% and Deposits registering a growth of over 25 percent. However low cost CASA deposits share has seen sharp declines, and needs to be watched. Price to BookBecause a bank’s balance sheets consist mostly of financial assets with varying degrees of liquidity, book value is a good proxy for the value of a banking stock. Also many of the assets included in their book value are marked-to-market –in other words they are revalued every quarter to reflect shifts in the marketplace, which means that book value is reasonably current. So the base value for a bank should be the book value. Any premium over that, investors are paying for future growth and excess earnings. Typically big reputed banks trade at 2x to 4x book value.
Data, Analysis contributed by Bobby Mehrotra Want to collaborate with me and contribute towards India Stock Analysis? Bank of India is currently (Apr 13, 2009) trading at 1.25 Consolidated Book Vaue. On a TTM basis, it is again available at ~4.5 PE, which seem to suggets the stock isn't expensive. However dividend yield is lower at just 1.85% Overall verdictPut on watchlist. Need to investigate the reasons for poor Net Margins/RoEs in FY 2005, 2006. If you are interested in PSU Bank stocks in the Indian stock market, its time to get to get to quick-check stock analysis step 2: PSU Bank Peer Comparisons
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