Pain not yet over for Bank of India

No clarity on stress, weak capital affect earnings visibility

Like other public sector banks (PSBs), Bank of India (BoI), too, was hurt by higher provisions, which were up 40.9 per cent year-on-year (yo-y), in the March quarter (Q4). However, unlike other PSBs that saw share prices rise after the results, BoI's stock fell 5.8 per cent on Tuesday, compared to a 1.35 per cent decline in the Nifty Bank index. The lack of clarity about potential stress and a weak capital base have impacted sentiment, said analysts.

Moreover, BoI's higher than expected net loss of ~39.7 billion in Q4 would have been bigger, but for the postponement of some provisions that are permissible in the regulations.

According to analysts, not only for the Reserve Bank of India’s non-performing assets (NPAs) rules, but BoI also reported other slippages. Although slippages were down 29 per cent sequentially and loan recovery was sharp (~114.2 billion), restricting overall gross NPAs, down 3 per cent sequentially, the pain is not over yet.

Despite recognising additional NPAs, standard restructured assets, as of March 2018, were still 2 per cent of gross advances. down marginally from 2.8 per cent in the December quarter. Also, in the absence of any information on outstanding stress, such as a watch list by the management, analysts are sceptical of asset quality and earnings visibility.

Moreover, the bank has utilised the RBI's dispensations, such as spreading its mark-to-market provisions (for decline in market value of its investment in government securities) and reduction in provisions by 10 per cent in the National Company Law Tribunal (NCLT) cases. Consequently, the bank has carried forward some provisioning pain, which may affect its 2018-19 earnings.

These moves helped BoI curtail the impact on its capital, which is weak. The total capital under Basel-III, adjusted for net NPAs, is only 4 per cent of its risk-weighted assets. BoI's gross advances declined 3.8 per cent y-o-y in Q4. This, along with interest reversal, due to higher slippages, led to a significant 26.1 per cent y-oy fall in net interest income.

The management expects its loan book to grow 810 per cent, which will be tough, if it can't arrange for the capital, analysts say. Motilal Oswal Securities, while maintaining its neutral rating on the lender, said, “We expect credit costs to decline gradually but stay elevated, weighing down return ratios.”