RBI action to impact growth of Bank of India

Bank of India
The Bank of India (BOI) stock shed five per cent after the Reserve Bank of India (RBI) placed the bank under the Prompt Corrective Action (PCA) list. Inclusion in the PCA is initiated if any bank breaches thresholds, which in case of Bank of India was insufficient core equity capital, high net non-performing assets (bad loans or NPAs) and negative return on assets for two consecutive years. The move follows RBI’s onsite inspection based on its risk-based supervision model for FY17.

While the bank’s high NPA ratio and negative return on assets in last two years were known, its common equity tier 1 or CET 1 (minimum capital under CAR) was 7.17 per cent at the end of FY17, above RBI’s norm of 6.75 per cent. This suggests that the bank is now short on the capital front too.

Under PCA, banks face restrictions on opening branches, giving increments to existing employees and can provide loans to only companies with above investment ratings. Analysts say that the RBI action will impact the bank’s credit growth and branch expansion plans. Over the last few months, while the bank was already working on cutting costs, it is now looking to shut 400 ATMs; decision on shutting another 300 is expected by February. BOI’s credit growth, which came in at 1.35 per cent in the September quarter (Q2), could also get impacted further.

Corporate loans, which account for over 47 per cent of BOI’s credit, fell nearly 6 per cent year-on-year in Q2. Analysts expect the trend to continue given lack of demand and regulatory oversight. BOI has been targeting the retail and medium and small enterprise (MSME) space where growth potential is better. While retail loans grew 17 per cent y-o-y in Q2, MSME loans grew by 8.5 per cent. The two segments account for 16-19 per cent each of the domestic loan book. Analysts say that, in the current situation, it will take time for the bank to scale up the retail book given the smaller ticket sizes and customer acquisition/servicing needs.

The PCA action will also mean that the bank will have to postpone its plans of raising Rs 3,000 crore through a qualified institutional placement, announced last month. BOI though is expecting capital infusion from the government through recapitalisation bonds, which should strengthen its balance sheet.

Nevertheless, asset quality is a key area, which the RBI flagged under the PCA. Though the net NPA ratio has come down from FY17 levels of 6.90 per cent to 6.47 per cent in Q2 it is still higher than the PCA threshold level of 6 per cent. Also, though BOI’s slippages fell 47 per cent on a sequential basis in Q2, analysts at Deutsche Bank say despite the improvement, gross NPA ratio at 12.6 per cent still remains one of the highest among peers and is a concern. What is compounding matters is the extremely weak revenue drivers with net interest margins at two per cent, negligible loan growth and weak cost structure. Clearly, BOI will have to step up its effort on all these fronts.

While BOI’s price-to-book stock valuation at under one time for FY19 is not demanding, the quantum of capital infusion, improvement in asset quality and margins are crucial factors the street will keep an eye out for. 

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