Bank of India. CMP: INR80 TP: INR85 (+6%) Neutral

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1 BSE SENSEX S&P CNX 25,305 7,749 Bloomberg BOI IN Equity Shares (m) M.Cap.(INR b)/(usd b) 65.7/ Week Range (INR) 208 / 79 1, 6, 12 Rel. Per (%) -16/-34/-51 12M Avg Val (INR M) 473 Free float (%) 32.0 Financials & Valuation (INR Billion) Y/E March E 2018E NII OP NP NIM (%) EPS (INR) EPS Gr. (%) NM NM ROE (%) ROA (%) BV/Sh. (INR) ABV/Sh Div. Payout Valuations P/E(X) P/BV (X) P/ABV (X) Div. Yield (%) May QFY16 Results Update Sector: Financials Bank of India CMP: INR80 TP: INR85 (+6%) Neutral Weak core operating performance; Asset quality pressures persists Bank of India (BOI) reported net loss (INR35.9b) for the fifth consecutive quarter on adjusted basis. Continued weakness in asset quality and core PPoP (-46% YoY; - 33% QoQ) marred overall performance. While headline NIM improved 11bp QoQ (2.07%), adj. for interest on IT refund (INR4.2b) margins continued to trend lower. Asset quality remained weak, with slippages increasing to INR168b (annualized ratio of 17% v/s 9% in 3QFY16); overall slippage ratio increased to ~10% in FY16 v/s 4.5% in FY15. During 4QFY16, ~30% of slippages were AQR related (~INR50b) mainly in iron and steel, power and roads. Fresh additions to restructured loans (RL) were INR1.8b (v/s INR1.6b in 2Q). Further, INR7.3b of SEB debt was classified as NPA (balance under UDAY scheme). Absolute GNPA increased 37% QoQ; upgrades and recoveries increased to INR30.4b highest ever on quarterly basis. While slippages are expected to remain elevated for next few quarters; management expects strong trends in upgrades/recoveries to continue (targets INR175b in FY17). Overall NSL ratio increased 160bp QoQ to 11.2%; OSRL declined 25% QoQ to INR128.7b led by SEB debt conversion and INR7.7b relapse from RL. Other highlights: (1) Post capital infusion by GOI/LIC/GIC and RBI dispensation on capital, CET 1 ratio has increased to 7.97% v/s 7% in 3QFY16, (2) Employee expenses include one-off provision of INR3.7b related to new LIC mortality table. Valuation and view: Asset quality performance remained weak, with higher levels of stress addition. Our key concerns are (a) weak capital position (CET1 ~8%), (b) subdued return ratios (with subdued return ratios ROA of % and sub-10% RoE, and (c) additional provisioning on SRs / loss amortization on sale of assets. Maintain Neutral with a target price of INR85 (0.25x FY18E BV). Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com); Krishnan ASV (A.Krishnan@MotilalOswal.com); / Dhaval Gada (Dhaval.Gada@MotilalOswal.com); Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 Exhibit 1: Quarterly Performance (INR m) Y/E March 4QFY16A 4QFY15E Var. (%) Comments Net Interest Income 31,872 28, NIMs adjusted for interest on IT refund were below % Change (Y-o-Y) 12 1 expectation Other Income 8,836 12, Fee income below expectation (-46% YoY) Net Income 40,708 41,368-2 Operating Expenses 26,066 27,191-4 Operating cost growth below expectation Operating Profit 14,642 14,177 3 % Change (Y-o-Y) 3-1 Other Provisions 54,704 34, Credit costs significantly above expectation (5.6% v/s 3.5% in 3QFY16) Profit before Tax -40,062-19, Tax Provisions -4,191-3, Net Profit -35,871-16, Weak core PPoP performance and higher provisioning resulted in net loss for third consecutive quarter % Change (Y-o-Y) NM NM Other highlights During the quarter, BOI saw INR35.3b of SEB debt conversion under UDAY scheme; additional INR23.5b of SEB debt is expected to get converted in FY17. BOI had deferred provisions of INR2.1b in respect of loss on sale to ARC. Bank sold INR80m loans to ARC during the quarter Domestic SA deposits grew 13% YoY (+7% QoQ) whereas; CA deposits grew by 8% YoY (-14% QoQ). Overall domestic CASA ratio improved to 34.2% v/s 32.3% in 3QFY16 and 29.5% in FY15. Calculated PCR decreased 140bp QoQ to 43.9%. Capital conservation efforts continue with loans de-growing by 11% YoY and RWA by -5% YoY. Maintain Neutral with a target price of INR85 (0.25x FY18E BV) Valuation and view Asset quality performance remained weak, with higher levels of stress addition. Our key concerns are (a) weak capital position (CET1 ~8%), (b) subdued return ratios (with subdued return ratios ROA of % and sub-10% RoE, and (c) additional provisioning on SRs / loss amortization on sale of assets. Maintain Neutral with a target price of INR85 (0.25x FY18E BV). We have raised cost of equity to 16.5% v/s 15.3% previously led by higher market risk premium (6% v/s 5% previously) partly offset by lower risk free rate (7.5% v/s 7.75% previously). Beta assumption remains unchanged at 1.5. Analyst Meet Takeaways Guidance for FY17 (a) Recovery and upgradation target of INR175b, (b) Domestic CASA Ratio 38%, (c) Share of Retail, Agri and MSME (RAM) loans to increase to 55% of loans Asset quality related Have fully implemented AQR direction in 4QFY16 SMA 2 is down 33% QoQ Have refinanced 10 accounts under 5:25 scheme amounting to INR21.65b (further two accounts under pipeline) SDR was invoked in 7 accounts amounting to INR9.67b 25 May

3 AQR related provision during the quarter was INR18.7b (cumulative INR40.7b in FY16) During the quarter, one large infra account slipped in the overseas book Security receipts outstanding are INR28b During 4QFY16, bank marked down security receipts by ~INR2b Stock of written off accounts stands at INR74.2b Other highlights Bank saw net INR60b benefit from RBI relaxation on capital (INR19.2b from DTA, INR27b from revaluation reserve and INR13.8b from FCTR) Will require around INR25b additional CET1 capital in FY17 No suggestion / directive received from government or any other organisation on merger Plan to monetise non core assets and strategic investments worth INR10b in FY17 Average age of staff at 40 years Interest reversal during the quarter was INR3b Interest on IT refund during 4QFY16 was INR4.21b Exhibit 2: We raise earnings led by strong performance on upgrades / recoveries and management guidance of lower net slippages in FY17 INR B Old Estimate Revised Estimate Change (%) FY16 FY17 FY18 FY16 FY17 FY18 FY16 FY17 FY18 NII Other Income Total Income Operating Exp Operating Profits Provisions PBT Tax PAT Loans 4,020 4,503 5,133 3,592 4,023 4, Deposits 5,532 6,306 7,315 5,130 5,746 6, Margins (%) Credit Cost (%) RoA (%) RoE (%) EPS NM BV Adj. BV May

4 Exhibit 3: DuPont Analysis: Return ratios to improve gradually led by lower provisioning costs and better risk adj. NIMs (%) Y/E MARCH FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E Net Interest Income Fee income Fee/Net Income Ratio Core Operating Income Operating Expenses Cost/core Income ratio Employee cost Others Core Operating Profits Forex Income Non-Core Income Operating Profits Provisions NPA provisions Other Provisions PBT Tax Tax Rate RoA Leverage (x) RoE Exhibit 4: DuPont Analysis: Profitability impacted by weak revenue growth and asset quality performance (%) Y/E MARCH 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 NII Fee income Fee income to core income Core Operating Income Operating Expenses Cost to Core Inc ratio (%) Employee cost Other operating expenses Core operating Profits Trading and others Non Interest income Operating Profits NPA provisions Other Provisions PBT Tax Tax Rate (%) RoA Leverage (x) RoE Source: Company, MOSL 25 May

5 Story in charts Exhibit 5: Loan growth remains muted Exhibit 6: Deposit growth remains subdued; Domestic CD ratio remains stable QoQ at 71% Loan (INR b) Loan Growth (%) ,149 2,170 2,331 2,515 2,642 2,604 2,804 2,930 3,094 3,368 3,565 3,762 3,816 3,993 4,104 4,107 3,951 3,951 3,973 3, QFY12 1HFY12 9MFY12 FY12 1QFY13 1HFY13 9MFY13 FY13 1QFY14 1HFY14 9MFY14 FY14 1QFY15 1HFY15 9MFY15 FY15 1QFY16 1HFY16 9MFY16 FY16 Deposits (INR b) Deposits Growth (%) ,931 2,991 3,073 3,182 3,390 3,327 3,491 3,818 4,150 4,323 4,541 4,770 5,009 5,184 5,302 5,319 5,083 5,252 5,288 5,130 1QFY12 1HFY12 9MFY12 FY12 1QFY13 1HFY13 9MFY13 FY13 1QFY14 1HFY14 9MFY14 FY14 1QFY15 1HFY15 9MFY15 FY15 1QFY16 1HFY16 9MFY16 FY16 Exhibit 7: GNPAs increased by 37% QoQ; Computed PCR decreased 140bp QoQ to 43.9% Exhibit 8: OSRL decreased 25% QoQ led by SEB bond conversion GNPA (%) NNPA (%) PCR (%) Restructured Loan (INR b) % of Loans QFY12 1HFY12 9MFY12 FY12 1QFY13 1HFY13 9MFY13 FY13 1QFY14 1HFY14 9MFY14 FY14 1QFY15 1HFY15 9MFY15 FY15 1QFY16 1HFY16 9MFY16 FY16 1QFY12 1HFY12 9MFY12 FY12 1QFY13 1HFY13 9MFY13 FY13 1QFY14 1HFY14 9MFY14 FY14 1QFY15 1HFY15 9MFY15 FY15 1QFY16 1HFY16 9MFY16 FY Exhibit 9: Cost to income ratio remains elevated (%) Exhibit 10: Credit costs spikes to 5.5%+ Credit costs (%, annualized) QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 4QFY10 2QFY11 4QFY11 2QFY12 4QFY12 2QFY13 4QFY13 2QFY14 4QFY14 2QFY15 4QFY15 2QFY16 4QFY16 Source: Company, MOSL Source: Company, MOSL 25 May

6 Exhibit 11: Quarterly Snapshot FY15 FY16 Variation (%) INR m 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q QoQ YoY Profit and Loss Net Interest Income 26,865 30,307 27,802 28,463 29,127 30,197 27,080 31, Other Income 10,245 10,064 10,797 11,222 8,406 7,781 10,473 8, Trading profits 2,430 1,530 3,200 2,150 1,790 1,190 3, Forex Income 1,620 1,960 1,540 1,740 1,270 1,240 2,680 3, Recoveries 460 1, , Others (Non core) 5,735 5,534 5,127 6,122 4,856 4,771 3,713 3, Total Income 37,110 40,371 38,599 39,684 37,533 37,978 37,553 40, Operating Expenses 16,507 19,016 19,945 25,419 20,490 23,396 23,463 26, Employee 10,726 11,348 12,882 14,903 11,194 12,782 13,052 16, Others 5,781 7,668 7,063 10,516 9,297 10,614 10,411 9, Operating Profits 20,603 21,355 18,654 14,266 17,042 14,583 14,090 14, Provisions 8,931 9,634 15,807 22,555 15,147 32,374 36,039 54, NPA provisions 8,570 7,920 13,380 22,400 21,190 30,360 35,060 54, Provisions on Invst ,300 1,340 3 NM Others 1,291 1,314 2, ,243 1, ,056 NM NM PBT 11,672 11,721 2,847-8,289 1,895-17,791-21,950-40,062 NM NM Taxes 3,615 3,861 1,113-7, ,529-6,894-4,191 NM NM PAT 8,057 7,860 1, ,297-11,262-15,056-35,871 NM NM Ratios (%) Fees to Total Income Cost to Core Income Tax Rate ,095-8,277 CASA Reported (Domestic) Loan/Deposit Domestic Loan/ Deposit CAR Tier I* Global Margins Domestic Margins NA 2.4 NA 16 Overseas Margins NA 1.3 NA May

7 Exhibit 12: Quarterly Snapshot continued FY14 FY15 FY16 Variation (%) INR b 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q QoQ YoY Balance sheet Deposits 4,150 4,323 4,541 4,770 5,009 5,184 5,302 5,319 5,083 5,252 5,288 5, Domestic 3,161 3,222 3,397 3,636 3,815 3,884 3,961 3,980 3,764 3,899 3,915 3, International 989 1,101 1,144 1,134 1,194 1,301 1,341 1,339 1,319 1,353 1,373 1, Loans 3,094 3,368 3,565 3,762 3,816 3,993 4,104 4,107 3,951 3,951 3,973 3, Domestic 2,089 2,328 2,354 2,643 2,619 2,685 2,761 2,895 2,810 2,786 2,783 2, International 1,005 1,040 1,211 1,120 1,197 1,307 1,343 1,212 1,141 1,165 1,190 1, Intl business as a % of total CASA Deposits ,020 1,055 1,056 1,076 1,112 1,144 1,157 1,195 1,239 1, Savings ,008 1,014 1, Current Domestic Loan Break Up Retail SME Agriculture Corporate 1,198 1,374 1,378 1,535 1,540 1,525 1,538 1,605 1,563 1,509 1,482 1, O/s exposure to Infrastructure Domestic Investments Break Up SLR , ,041 1, ,006 1, NON SLR HTM AFS Asset Quality GNPA NNPA GNPA (%) NNPA (%) PCR (Calculated, %) PCR (Reported, %) Movement in Gross NPA Opening Slippages Deductions Of Which : Due to write Off Due to Upgradation Due to Recoveries Closing adjusted Slippage Ratio (%) Credit Cost (%) Source: Company, MOSL 25 May

8 Exhibit 13: Financials: Valuation metrics 66 Rating CMP Mcap EPS (INR) P/E (x) BV (INR) P/BV (x) ABV (INR) P/ABV (x) RoA (%) RoE (%) (INR) (USDb) FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 ICICIBC* Buy HDFCB Buy 1, AXSB Buy KMB* Buy YES Buy IIB Buy 1, IDFC Bk Buy FB Neutral DCBB Buy JKBK Neutral SIB Buy Private Aggregate SBIN (cons)* Buy PNB Neutral BOI Neutral BOB Buy CBK Neutral UNBK Buy OBC Neutral INBK Buy ANDB Buy IDBI Neutral Public Aggregate Banks Aggregate HDFC* Buy 1, LICHF Buy IHFL Buy GRHF Buy REPCO Buy DEWH Buy Housing Finance RECL Neutral POWF Neutral Infra Finance SHTF Buy 1, MMFS Buy BAF Buy 7, ,622 1, ,622 1, MUTH Buy SKSM Buy Asset Finance NBFC Aggregate Financials *Multiples adj. for value of key ventures/investments; For ICICI Bank and HDFC Ltd BV is adjusted for investments in subsidiaries 25 May

9 Financials and valuations Income Statement (INR Million) Y/E March E 2018E 2019E Interest Income 217, , , , , , , , ,470 Interest Expense 139, , , , , , , , ,818 Net Interest Income 78,107 83,134 90, , , , , , ,652 Change (%) Non Interest Income 26,418 33,212 37,660 42,918 42,327 36,525 44,255 51,135 57,908 Net Income 104, , , , , , , , ,559 Change (%) Operating Expenses 50,682 49,407 53,315 66,995 80,886 93,415 99, , ,623 Pre Provision Profits 53,842 66,939 74,585 84,229 75,228 60,356 66,161 80,734 97,936 Change (%) Provisions (excl tax) 18,888 31,164 44,508 48,779 56, ,264 55,128 52,749 62,049 PBT 34,954 35,775 30,077 35,451 18,301-77,908 11,033 27,985 35,887 Tax 10,067 9,000 2,584 8, ,016 3,310 8,396 10,766 Tax Rate (%) PAT 24,887 26,775 27,493 27,293 17,440-60,892 7,723 19,590 25,121 Change (%) Equity Dividend (Incl tax) 4,443 4,660 6,971 3,755 4, ,799 4,564 5,853 Core PPP* 48,377 57,900 61,672 68,673 62,288 50,426 51,161 62,234 76,436 Change (%) *Core PPP is (NII+Fee income-opex) Balance Sheet (INR Million) Y/E March E 2018E 2019E Equity Share Capital 5,472 5,745 5,966 6,430 6,657 8,173 8,336 8,336 8,336 Reserves & Surplus 167, , , , , , , , ,216 Net Worth 172, , , , , , , , ,552 Deposits 2,988,858 3,182,160 3,818,396 4,769,741 5,319,065 5,130,045 5,745,651 6,607,498 7,598,623 Change (%) of which CASA Dep 759, , ,070 1,094,385 1,176,446 1,279,240 1,471,126 1,735,929 2,048,396 Change (%) Borrowings 220, , , , , , , , ,391 Other Liabilities & Prov. 129, , , , , , , , ,041 Total Liabilities 3,511,725 3,845,355 4,526,027 5,731,902 6,186,978 6,099,139 6,751,336 7,703,060 8,810,607 Current Assets 373, , , , , ,413 1,018,455 1,147,094 1,219,392 Investments 858, , ,134 1,141,524 1,197,921 1,188,489 1,331,108 1,530,774 1,760,390 Change (%) Loans 2,130,962 2,488,333 2,893,675 3,707,335 4,020,256 3,591,890 4,022,916 4,586,125 5,319,905 Change (%) Fixed Assets 24,807 27,716 28,701 57,861 58,855 84,803 87,803 89,803 91,803 Other Assets 124, , , , , , , , ,117 Total Assets 3,511,725 3,845,355 4,526,027 5,731,902 6,186,978 6,099,139 6,751,336 7,703,060 8,810,607 Asset quality (%) GNPA (INR M) 48,116 58,940 87, , , , , , ,961 NNPA (INR M) 19,450 36,564 59,473 74, , , , , ,535 GNPA Ratio NNPA Ratio PCR (Excl Tech. write off) PCR (Incl Tech. Write off) E: MOSL Estimates 25 May

10 Financials and valuations Ratios Y/E March E 2018E 2019E Spreads Analysis (%) Avg. Yield-Earning Assets Avg. Yield on loans Avg. Yield on Investments Avg. Cost-Int. Bear. Liab Avg. Cost of Deposits Interest Spread Net Interest Margin Profitability Ratios (%) RoE RoA Int. Expense/Int.Income Fee Income/Net Income Non Int. Inc./Net Income Efficiency Ratios (%) Cost/Income* Empl. Cost/Op. Exps Busi. per Empl. (INR m) NP per Empl. (INR lac) * ex treasury and Recoveries Asset-Liability Profile (%) Loans/Deposit Ratio CASA Ratio Investment/Deposit Ratio G-Sec/Investment Ratio CAR Tier Valuation Book Value (INR) Change (%) Price-BV (x) Adjusted BV (INR) Price-ABV (x) EPS (INR) Change (%) Price-Earnings (x) Dividend Per Share (INR) Dividend Yield (%) E: MOSL Estimates 25 May

11 Corporate profile: Bank of India Company description Bank of India, established in 1906, is one of the largest PSU banks in the country. The bank, headquartered in Mumbai, has an established presence in Western and Eastern regions of the country. As of March 31, 2016, the bank had 5,016 branches and 7,807 ATMs. The bank has presence in 5 overseas subsidiary banks in Indonesia, Tanzania, New Zealand, Uganda and Botswana. Government of India shareholding in the bank stood at ~70.3%. Exhibit 16: Sensex rebased Exhibit 17: Shareholding pattern (%) Mar-16 Dec-15 Mar-15 Promoter DII FII Others Note: FII Includes depository receipts Exhibit 19: Top management Name Designation V R Iyer Chairperson & MD B P Sharma Executive Director Arun Shrivastava Executive Director Gopal Bhagat GM - Treasury Exhibit 18: Top holders Holder Name % Holding LIC of India 14.9 The New India Assurance Co. Ltd 1.1 Exhibit 20: Directors Name V R Iyer Harvinder Singh D Harish Neeraj Bhatia Sanjiv Kumar Arora Antonio Maximiano Pereira Name Rajeev Lochan Bishnoi B P Sharma Arun Shrivastava Anup Wadhawan S S Barik Exhibit 21: Auditors Name Andros & Co D Singh & Co Isaac & Suresh J P Kapur & Uberai M M Nissim & Co SRB & Associates Type Statutory Statutory Statutory Statutory Statutory Statutory Exhibit 22: MOSL forecast v/s consensus EPS (INR) MOSL forecast Consensus forecast Variation (%) FY FY FY May

12 BANK OF INDIA REPORT GALLERY BOI BOI SECTOR UPDATES

13 N O T E S 25 May

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