Bank of India’s swing to profit in Q1 is but a brief relief
The fact that Bank of India swung to a profit in the quarter ended 30 June after being mired in losses for two consecutive quarters was reason enough for the stock to gain nearly 4%. But dig into the details of the bank’s results and the picture gets ugly. Yes, bad loans as a percentage of the loan book have reduced for two consecutive quarters, albeit marginally. Even fresh slippages have dropped to Rs4,037 crore for the June quarter from Rs6,915 crore for the previous quarter. This essentially means that the rate at which loans are turning bad has slowed and even upgrades were better than the previous quarter.
So why should investors worry? Let us look at what the state-owned lender has in the name of troubled accounts. Bank of India has a total exposure of Rs8,200 crore to 10 of the dozen corporate cases that the Reserve Bank of India (RBI) has asked lenders to refer under the Insolvency and Bankruptcy Code (IBC). A lot depends on an untested resolution process to get this stock of loans to perform. The bank has made 60% of the provisions required for these accounts and will have to make another Rs915 crore worth of provisions spread over three quarters.
Even after dropping for two successive quarters, the gross non-performing asset (NPA) ratio stands at 13.05% of the loan book and the bad loan stock at Rs51,019 crore is not easy to manage. Besides this, the bank has close to Rs11,000 crore of standard restructured accounts that are vulnerable.
But the weakest point for Bank of India is its core income. Net interest income fell 8.72% from a year ago and was down a massive 27% from the previous quarter and the reason is quite obvious. The bank’s loan book didn’t grow at all as its corporate loan portfolio shrunk offsetting the 13% growth in retail. To be fair, this could be by design as the bank wants to increase the share of retail borrowers.
Here is another worrying metric. The operating profit of Bank of India hasn’t been stable for quite some time now because it is being driven by non-interest income. For the June quarter, operating profit was down 24% sequentially.
Perhaps investors are overlooking these weaknesses since the lender’s stock has outperformed the broad market over the last two months. Given the pain points for the lender, even a valuation of 0.65 time its estimated book value for 2017-18 for the Bank of India stock may not tempt investors.