Friday, November 1, 2013

Why Bank of India is in a Strong Uptrend Now?

The stock of Bank of India surged further by 5.50% today, after yesterday's impressive gain of 21.47%. Is it just the good Q2 results, or is it just moving much like how Bank Nifty is moving? Here are the real reasons why Bank of India stock is in a strong uptrend now:

Bank of India has surprised the market by not only improving its bottomline beyond expectations, but by a sharp improvement in its asset quality unlike some of its peers. The results has come as a further vindication for the contrarian strategies of Chairperson VR Iyer who took over leadership of the Mumbai headquartered lender during the last December quarter. Bank of India's second quarter net profit has doubled to Rs 622 crore from Rs 302 crore in a year ago period. The market, stunned by the results, took the public sector lender's stock up by 21.47% on October 31st, the results day.

But today the stock gained further, after the bank disclosed after market hours yesterday that its board has approved the raising of bank's Tier-1 capital by issue of fresh equity shares aggregating Rs 1000 crore to the government on preferential allotment basis.

The result has come as a huge inspiration for BoI as it is preparing in full swing, as the host, for the prestigious Bancon 2013, IBA's annual banking conference. Iyer's biggest strength is the fact that she is a realistic leader, even if that makes her a contrarian CMD in her industry. 

For example, Iyer has been candid enough to admit that Bank of India like most of its public sector peers faces an uphill task in both credit growth as well as in deposit mobilization. As another instance, While everyone is harping on retail loans to be the next game-changer in public sector banking sphere, she forecasts that retail loans alone won’t be enough to replace the volumes of large corporate loans that PSBs like BoI are known for. 

Bank of India has also created one of the most comprehensive recovery mechanisms for addressing defaulters. This works under the direct supervision of CMD VR Iyer and Executive Directors BP Sharma, Arun Shrivastava, and R. Koteeswaran. This includes appointing over 5000 Business Correspondents for communicating with and recovering from thousands of small rural defaulters, as well as more stringent methods for addressing wilful corporate defaulters. The bank had set up Debt Recovery Branches, and is actively pursuing even written-off accounts. Like a few of its peers, BoI has indicated that it won’t leave no stone unturned in its pursuit of recovery from large wilful defaulters, including methods like name-and-shame strategies. 

All these strategies have effectively helped BoI in reversing asset quality degradation. Gross non-performing advances (NPAs) as a percentage of gross advances fell 11 basis points sequentially (down 49 bps on yearly basis) to 2.93 percent. Net NPAs as a percentage of net advances dropped 25 bps Q-o-Q (down 19 bps Y-o-Y) to 1.85 percent in three-month period ended September 2013. Provisions and contingencies declined 20.6 percent year-on-year (up 77.5 percent quarter-on-quarter) to Rs 1,232 crore during second quarter. 

At the same time, the large-sized PSU lender is not allowing a slack in its diligence. In fact, Provision coverage ratio has improved to 63.29 percent as on September 30 as against 60.97 percent in June quarter. 

Chairperson VR Iyer’s strategies are now hinging on increasing the profitability of BoI. Towards this end, the credit/deposit ratio is being improved to ultimately reach an ambitious 78%. Towards this objective, BoI is following a six-prong strategy that includes emphasis on CASA growth, expansion of SME, Retail and Rural Businesses, focus on Credit Monitoring and Recovery, inclusive growth through Financial Inclusion, progress on IT Enabled Services for better customer satisfaction, and focused attention on Human Resources. 

The latest quarterly results is all the more impressive as despite being driven by other income and lower provisions, the performance is despite a sharp jump in tax expenses. Net interest income, the difference between interest earned and interest expended, grew 15 percent year-on-year to Rs 2,527 crore during September quarter. While other income of the public sector lender increased to Rs 1,100 crore from Rs 894 crore Y-o-Y, Tax expenses surged to Rs 248.43 crore from Rs 0.10 crore during the same period. 

Bank of India is bullish on growing its international business too. BoI is now in operation across 20 countries with 51 offices outside the country. One more branch was opened in Tanzania during last fiscal, while the representative office in Johannesburg was upgraded to branch. The Bank now plans to open subsidiaries in Canada, Brazil, & Botswana, while a representative office will be set up in Myanmar.

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