Our central investment theme of high core profit growth and asset quality improvement is playing out well in Bank of India, which was amply evident in Q4 FY07 results. While results have been far above our expectation, core profit growth was in line with expectation. Net NPAs have halved from the March 06 levels to 0.74%. We have revised our profit growth expectation for FY08 by 2.4%, though maintained flat for FY09. We maintain our BUY rating on the stock with a price target of Rs 244.

Result update Stable margins through sustained CASA of 40%

Despite a 31% loan book (against our expected 26%), pressure on resources remained low as CASA was stable at 40% (expected 39%). Higher yields on the loan book (94bps expansion during FY07), and contained deposit cost (26bps expansion), pushed up margins by 19bps yoy to 3.2%.

Robust fee income traction

BOI has maintained its fee income traction reflected in the 31% growth in commission exchange and brokerage and 23% in the forex income. Sustained domestic business along with robust international operations (20% of the volumes and 30% of the operating profit) has kept fee income growth high.

Asset quality improvement on fast track

We rate BOI as the best play on asset quality improvement. We derive comfort from the Bank’s contained loan growth strategy for FY08 and high focus on recoveries. Gross NPAs in FY07 have come down from 3.7% to 2.4% and net NPAs from 1.5% to 0.74%. Recoveries during the year stood at Rs10bn.

Sustained high ROE could improve valuations for the Bank

We expect ROE to average 21% over FY07-09. Even despite a likely equity dilution of 15%, ROE would still remain high at ~17.5% in FY08. This is likely to keep valuations high for BOI. We maintain our BUY rating on the stock with a price target of Rs244.