praveen
07-01-2008, 06:38 AM
THERE IS NEWS ABOUT THE SUBPRIME CRISIS MAY HIT BANK OF INDIA
(The significance of this move is that the net profits of the BANK OF INDIA would be dented for the third quarter ended December to the extent of the provisions that they decide to make )
Note :- Though the fundamentals are good we advice to get into the stock only on declines
Bank of India, one of the top five public sector banks in India, has a presence in Merchant banking, Housing Finance, Leasing, Venture capital, Credit card, Mutual Fund, Stock Broking, etc apart from normal banking activities. It embarked on a major expansion plan to increase its branch network in rural and semi urban areas after its nationalization and was the first Indian bank to open a branch outside the country. The bank has embarked on a rapid modernization drive and had plans to bring almost 90% of its business under the high-end Core Banking Solutions (CBS) technology by December 07. Significant overseas presence and competitive funding costs are its other key strengths. Moreover, the fact that non interest income constitutes a substantial portion of its total income adds to its strength. Bank of India also has the ability to raise further capital to fund growth as the government’s stake of 70% is far higher than the minimum requirement of 51%. Also, it is one of the few public sector banks with an open limit for FIIs. Presently FIIs hold 16.44% of its share capital. This coupled with the bank’s foray in the high growth life insurance sector is likely to provide opportunity for high growth with limited downside in the near future.
Industry
The banking sector in India is highly fragmented with 30 banking units contributing almost 50% of deposits and 60% of advances. Nationalized banks (banks owned by the Indian government) continue to be the major lenders in the economy due to their sheer size and penetrative networks which assures them high deposit mobilization. Indian banking can be broadly categorized into nationalized and private banks and specialized banking institutions. Until the 1980s, the Indian financial system was strictly controlled. Interest rates were administered, formal and informal parameters governed asset allocation, and strict controls limited entry into and expansion within the financial sector. Bank profitability was low, non- performing assets were comparatively high, capital adequacy was diminished, and
operational flexibility was hindered. The economic reform program, which began in 1991, encompassed the financial sector. Deregulation of interest rates, emergence of liberalized domestic capital markets and entry of new private sector banks has progressively intensified the competition among banks. The Indian Banking sector is comprised of 84 scheduled commercial banks (SCBs) of which 28 are public sector banks, 19 old private banks, 8 new private banks and 29 foreign banks as on June 30, 2006. In addition, there are 109 regional rural banks and 1864 urban cooperative banks.
Retail Finance: India is a hugely under-penetrated country in terms of retail banking services. With the undergoing structural changes in the Indian economy, resultant rapid growth, rising income levels and higher aspiration levels, retail finance/credit has a huge growth potential. Of late, retail credit has rightly been the focus area for banks. Retail credit has grown its share in total bank credit from 6.4% in 1995 to 22.5 % in 2006. It has the potential to grow at more than 30% p.a. for the next 3-5 years.
Technology is emerging as a key- driver of business in the banking and financial services industry. Banks are developing alternative channels of delivery such as ATMs, tele banking, remote access and internet banking. Banks are also implementing “Core Banking” or “Centralized Banking”, which provides connectivity between branches and helps offer a large number of value added products, benefiting a larger number of customers. Public sector banks have been slow in adapting to new technologies till date. However, now they are aggressively pursuing branch modernization, setting up ATMs and implementing Core Banking Solutions (CBS) which is likely to provide them with a solid technological backbone for strong growth in future. Fee-based activities: Banks have also started rendering fee based services viz. Insurance, Asset Management, Stock Broking, wealth management, financial products distribution, etc. which have a huge growth potential. This should lead to higher growth, improving margins and stability by reducing the bank’s vulnerability to interest rate fluctuations and by ensuring a steady stream of cash flows. Public sector banks are best placed to leverage their extensive branch networks and captive clientele for such non-fund based activities.
Company
Bank of India (BOI) was incorporated in 1906 by a group of eminent businessmen in Bombay, was under private ownership till 1969 and was nationalized along with 13 other major Banks. The bank has grown rapidly over the years to become one of the top five stateowned banks in the country with a significant overseas presence too. Nearly 1/5th of its business is derived from overseas operations. The bank has seen substantial improvement in its financial health over the past 12 months, led by rising net interest margins and improvement in asset quality due to lower incremental defaults, aggressive provisioning and write-offs.
Bank of India has 26 international branches (as in Sep.'07). The bank has been operating in Indonesia for the past 30 years and in Singapore for the past 50 years. It has acquired PT Bank Swadesi Tbk in Indonesia, which has 10 branch licenses in hand for expansion. BoI is also planning to open branches in Karachi (Pakistan) and Dhaka
(Bangladesh).
Key Investment Arguments
Bank of India has a market cap of Rs. 18192.0cr, average daily volume of 397544 shares for the last six months and total interest income of Rs. 10604.0cr during the trailing twelve months ended September 30, 2007.
It’s net profit margins were at 12.2% in FY07 and improved to 13% in the 1st half of FY08. The bank has seen a 5-year CAGR of 10.4% in its ‘Interest earned’ and 17.2% in its net profits. Growth has accelerated over the last two years as Interest earned grew at a 2-year CAGR of 23.4% and net profits at 81.7%. Performance in 1st half of FY08 has been even better with ‘interest earned’ growing at 38.2% yoy and net profit growing at 76% yoy.
Bank of India trades at a PE multiple of 12.6 based on trailing twelve month (TTM) earnings, Price to Book ratio of 3.2 on FY07 book-value and Price to Sales ratio of 1.7 based on total interest earned during the trailing twelve months.
BOI's shareholding pattern reveals that FII holdings were at 16.44% as of September 2007, up from 14.89% a year ago. It is one of the few stocks in the public-sector banking space with an open limit for FIIs. This is likely to provide a support on the downside as FIIs will look to increase their holdings in the bank.
Significant overseas presence and competitive funding costs are its key strengths. With the government's stake at 70%, the bank has the option to raise further equity to fund growth. This is a flexibility that many other state-owned banks lack (regulations require a minimum of 51% stake to be held by the government).
By FY07, 1,044 branches of BoI were brought under the Core Banking Solution. The bank had planned to cover another 500 branches by FY08. This was scheduled to be completed by Dec.'07. In all, 1,544 branches would be brought under the CBS. So, 90% of the business would have been covered under the upgraded technology by Dec.'07.
As in Sep.'07 BoI had 2,755 branches and 126 licenses for new branches in hand. By FY08, it is likely to use up these licenses for opening new branches and increase its reach.
The bank has steadily reduced its NPAs as a % of net advances. From a high of 5.37% in FY03, NPAs were just 0.74% in FY07.
Bank’s business per employee has improved consistently from Rs. 2.43cr in FY03 to Rs. 4.98cr in FY07. With the implementation of high end technology, business per employee should improve further going ahead.
Bank of India has a high credit deposit ratio of 70.2% signaling better utilization of funds. It also has a comparatively high percentage of non-interest income and maintains a high return on net worth of 21.25% which is far better than its immediate peers.
Key Concerns
Indirect intervention by the government (majority stakeholder) for social-sector lending.
Rising interest rates: The bank’s earnings remain vulnerable to rising interest rates.
Latest Developments
Bank of India (BoI) is raising funds in the range of Rs 1,400-1,500 crore to finance their forthcoming ventures, new initiatives and credit expansion. In this fiscal year, the bank has raised Rs. 650cr of Tier I capital through perpetual bond issuance and added another Rs. 734cr to its Tier II capital through revaluation of property.
Central government is likely to dilute 5% of its stake in the bank from the present 69.47% to 64.47%. The board of BoI has cleared the proposal to raise money through sale of 3.77 crore shares to qualified institutional investors (QIIs) at a minimum share price of Rs. 359/- each. The shares will be sold to mutual funds and public sector enterprises. The actual pricing of shares will be based on the price ruling at the time the bank actually taps the capital market.
Union Bank of India, Bank of India and Japan-based Dai-ichi Mutual Life Insurance have floated a life insurance joint venture company with an initial authorized capital of Rs. 250cr. Union Bank will hold a majority 51% stake in the joint venture. Bank of India and Dai-ichi will hold 23% and 26% respectively, in the company.
Conclusion
On the basis of research, we feel that this is a good stock to buy at the current market price of Rs. 373.25. If everything goes well, the price is likely to appreciate to Rs. 470.0, within 12 months, translating into a gain of about 26%.
Complied from BC
(The significance of this move is that the net profits of the BANK OF INDIA would be dented for the third quarter ended December to the extent of the provisions that they decide to make )
Note :- Though the fundamentals are good we advice to get into the stock only on declines
Bank of India, one of the top five public sector banks in India, has a presence in Merchant banking, Housing Finance, Leasing, Venture capital, Credit card, Mutual Fund, Stock Broking, etc apart from normal banking activities. It embarked on a major expansion plan to increase its branch network in rural and semi urban areas after its nationalization and was the first Indian bank to open a branch outside the country. The bank has embarked on a rapid modernization drive and had plans to bring almost 90% of its business under the high-end Core Banking Solutions (CBS) technology by December 07. Significant overseas presence and competitive funding costs are its other key strengths. Moreover, the fact that non interest income constitutes a substantial portion of its total income adds to its strength. Bank of India also has the ability to raise further capital to fund growth as the government’s stake of 70% is far higher than the minimum requirement of 51%. Also, it is one of the few public sector banks with an open limit for FIIs. Presently FIIs hold 16.44% of its share capital. This coupled with the bank’s foray in the high growth life insurance sector is likely to provide opportunity for high growth with limited downside in the near future.
Industry
The banking sector in India is highly fragmented with 30 banking units contributing almost 50% of deposits and 60% of advances. Nationalized banks (banks owned by the Indian government) continue to be the major lenders in the economy due to their sheer size and penetrative networks which assures them high deposit mobilization. Indian banking can be broadly categorized into nationalized and private banks and specialized banking institutions. Until the 1980s, the Indian financial system was strictly controlled. Interest rates were administered, formal and informal parameters governed asset allocation, and strict controls limited entry into and expansion within the financial sector. Bank profitability was low, non- performing assets were comparatively high, capital adequacy was diminished, and
operational flexibility was hindered. The economic reform program, which began in 1991, encompassed the financial sector. Deregulation of interest rates, emergence of liberalized domestic capital markets and entry of new private sector banks has progressively intensified the competition among banks. The Indian Banking sector is comprised of 84 scheduled commercial banks (SCBs) of which 28 are public sector banks, 19 old private banks, 8 new private banks and 29 foreign banks as on June 30, 2006. In addition, there are 109 regional rural banks and 1864 urban cooperative banks.
Retail Finance: India is a hugely under-penetrated country in terms of retail banking services. With the undergoing structural changes in the Indian economy, resultant rapid growth, rising income levels and higher aspiration levels, retail finance/credit has a huge growth potential. Of late, retail credit has rightly been the focus area for banks. Retail credit has grown its share in total bank credit from 6.4% in 1995 to 22.5 % in 2006. It has the potential to grow at more than 30% p.a. for the next 3-5 years.
Technology is emerging as a key- driver of business in the banking and financial services industry. Banks are developing alternative channels of delivery such as ATMs, tele banking, remote access and internet banking. Banks are also implementing “Core Banking” or “Centralized Banking”, which provides connectivity between branches and helps offer a large number of value added products, benefiting a larger number of customers. Public sector banks have been slow in adapting to new technologies till date. However, now they are aggressively pursuing branch modernization, setting up ATMs and implementing Core Banking Solutions (CBS) which is likely to provide them with a solid technological backbone for strong growth in future. Fee-based activities: Banks have also started rendering fee based services viz. Insurance, Asset Management, Stock Broking, wealth management, financial products distribution, etc. which have a huge growth potential. This should lead to higher growth, improving margins and stability by reducing the bank’s vulnerability to interest rate fluctuations and by ensuring a steady stream of cash flows. Public sector banks are best placed to leverage their extensive branch networks and captive clientele for such non-fund based activities.
Company
Bank of India (BOI) was incorporated in 1906 by a group of eminent businessmen in Bombay, was under private ownership till 1969 and was nationalized along with 13 other major Banks. The bank has grown rapidly over the years to become one of the top five stateowned banks in the country with a significant overseas presence too. Nearly 1/5th of its business is derived from overseas operations. The bank has seen substantial improvement in its financial health over the past 12 months, led by rising net interest margins and improvement in asset quality due to lower incremental defaults, aggressive provisioning and write-offs.
Bank of India has 26 international branches (as in Sep.'07). The bank has been operating in Indonesia for the past 30 years and in Singapore for the past 50 years. It has acquired PT Bank Swadesi Tbk in Indonesia, which has 10 branch licenses in hand for expansion. BoI is also planning to open branches in Karachi (Pakistan) and Dhaka
(Bangladesh).
Key Investment Arguments
Bank of India has a market cap of Rs. 18192.0cr, average daily volume of 397544 shares for the last six months and total interest income of Rs. 10604.0cr during the trailing twelve months ended September 30, 2007.
It’s net profit margins were at 12.2% in FY07 and improved to 13% in the 1st half of FY08. The bank has seen a 5-year CAGR of 10.4% in its ‘Interest earned’ and 17.2% in its net profits. Growth has accelerated over the last two years as Interest earned grew at a 2-year CAGR of 23.4% and net profits at 81.7%. Performance in 1st half of FY08 has been even better with ‘interest earned’ growing at 38.2% yoy and net profit growing at 76% yoy.
Bank of India trades at a PE multiple of 12.6 based on trailing twelve month (TTM) earnings, Price to Book ratio of 3.2 on FY07 book-value and Price to Sales ratio of 1.7 based on total interest earned during the trailing twelve months.
BOI's shareholding pattern reveals that FII holdings were at 16.44% as of September 2007, up from 14.89% a year ago. It is one of the few stocks in the public-sector banking space with an open limit for FIIs. This is likely to provide a support on the downside as FIIs will look to increase their holdings in the bank.
Significant overseas presence and competitive funding costs are its key strengths. With the government's stake at 70%, the bank has the option to raise further equity to fund growth. This is a flexibility that many other state-owned banks lack (regulations require a minimum of 51% stake to be held by the government).
By FY07, 1,044 branches of BoI were brought under the Core Banking Solution. The bank had planned to cover another 500 branches by FY08. This was scheduled to be completed by Dec.'07. In all, 1,544 branches would be brought under the CBS. So, 90% of the business would have been covered under the upgraded technology by Dec.'07.
As in Sep.'07 BoI had 2,755 branches and 126 licenses for new branches in hand. By FY08, it is likely to use up these licenses for opening new branches and increase its reach.
The bank has steadily reduced its NPAs as a % of net advances. From a high of 5.37% in FY03, NPAs were just 0.74% in FY07.
Bank’s business per employee has improved consistently from Rs. 2.43cr in FY03 to Rs. 4.98cr in FY07. With the implementation of high end technology, business per employee should improve further going ahead.
Bank of India has a high credit deposit ratio of 70.2% signaling better utilization of funds. It also has a comparatively high percentage of non-interest income and maintains a high return on net worth of 21.25% which is far better than its immediate peers.
Key Concerns
Indirect intervention by the government (majority stakeholder) for social-sector lending.
Rising interest rates: The bank’s earnings remain vulnerable to rising interest rates.
Latest Developments
Bank of India (BoI) is raising funds in the range of Rs 1,400-1,500 crore to finance their forthcoming ventures, new initiatives and credit expansion. In this fiscal year, the bank has raised Rs. 650cr of Tier I capital through perpetual bond issuance and added another Rs. 734cr to its Tier II capital through revaluation of property.
Central government is likely to dilute 5% of its stake in the bank from the present 69.47% to 64.47%. The board of BoI has cleared the proposal to raise money through sale of 3.77 crore shares to qualified institutional investors (QIIs) at a minimum share price of Rs. 359/- each. The shares will be sold to mutual funds and public sector enterprises. The actual pricing of shares will be based on the price ruling at the time the bank actually taps the capital market.
Union Bank of India, Bank of India and Japan-based Dai-ichi Mutual Life Insurance have floated a life insurance joint venture company with an initial authorized capital of Rs. 250cr. Union Bank will hold a majority 51% stake in the joint venture. Bank of India and Dai-ichi will hold 23% and 26% respectively, in the company.
Conclusion
On the basis of research, we feel that this is a good stock to buy at the current market price of Rs. 373.25. If everything goes well, the price is likely to appreciate to Rs. 470.0, within 12 months, translating into a gain of about 26%.
Complied from BC