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Rahul Ginodia

Bank of India (BSE: 532149) is one of the oldest Government owned (64.47%) commercial banks^[1] in India operating for over 102 years. It is the sixth largest Bank in terms of balance sheet size with an asset base of over Rs. 2,255 billion at the end of the FY2009. Over the last decade, the bank has built up a strong brand equity in the field of Corporate credit, Export finance, Forex and Customer services.^[2] Like any other Public Banks, the Bank also operates according to a conservative risk philosophy with a total corporate advances constituting 49% of its total advances portfolio as on 31st March, 2009 and reduced its Net Non-Performing Assets (NPA's) to 0.44% from 0.52% in FY08^[3]. Even in the challenging year, the Bank pegged 30.42% return on equity (ROE) in FY2009,^[4] which is the highest among industries compared to an industry average of 20% for Public Sectors Unit (PSU) banks and 15% for private banks.^[5].

Bank of India is one amongst the few Public Sector Banks which have significant foreign operations through 28 branches and in fact it was the first bank to open a branch outside India in 1946.^[6] In FY2009 17.82% of its total business came from foreign operations. In the time when other large foreign banks are struggling, the bank’s overseas business grew by over 24% compared to 14% in FY2008.^[7]

Business Overview

A group of distinguished businessmen from Mumbai founded Bank of India on 7th September, 1906. In 1969, after restructuring by the Government of India (GOI), the bank was nationalized (Owned by Government) along with 13 other banks.^[8] Ever Since it was taken over by GOI, it has made various notable contributions to India's economic growth in the field of agricultural and rural development, industrial diversification and modernization, and export business development .^[1] Following Reserve Bank of India (RBI) guidelines, Bank of India has implemented the Agricultural Debt Waiver and Debt Relief Scheme, 2008.^[9]

Bank of India was the first among the nationalised banks to establish a fully computerised branch, and ATM facility at its Mahalaxmi Branch in Mumbai way back in 1989. As on 31st March, 2009, the Bank had over 3021 branches spread all over India including 28 foreign branches/representative in 13 countries, spanning all time zones.^[3] Moreover, It has implemented Core Banking Solutions (CBS) across all its branches in India which allows the bank to offer anywhere banking to its customers

Business and Financial Metrics

Source : Company Reports

Bank of India Total Revenue and Net Income in the last five years.

In FY2009, Bank of India earned total revenue of Rs. 194 billion, an increase of 34% year on year (y-o-y) from Rs. 144.75 billion in FY2008^[10] driven by strong corporate and agriculture advances growth. In the period between FY05 to FY09, total revenue of the Bank increased from Rs. 72 billion to Rs. 194 billion, at a CAGR of 28.10%.^[10] This was a result of the growth in both Total Interest Income and Non Interest Income which grew at a CAGR of 25.20% and 27.50% respectively. In FY09, 84.30% of the total revenue came from gross interest, and another 15.70% from non-interest income. Fee income growth has slowed down to 23.40% in 4Q09 from 40.50% achieved in the 3Q2009 largely due to decreased business from corporates, as well as third party distribution. Due to the fall in bond yields of 10-year G-Securities, the Bank booked a healthy profit on its bond portfolio.

At the end of the FY2009, Bank of India had total assets of Rs. 2,255.02 billion, which has grown at a CAGR of 23.70% between FY05-09 driven by growth in current account and savings account (CASA) deposit. During 2008-09, total global business mix increased by 26.30% y-o-y to Rs. 3344.40 billion,^[11] fueled by growth in its domestic as well as foreign business activities. Current and savings accounts deposits to its aggregate deposits decreased to 31% in FY09 from 36% in FY08 and has put some pressure on expansion of interest margin, with savings accounts deposits growing by 14.27%, while current deposits declined 2.48% y-o-y in FY2009. Deposit collection from overseas segment has shown a good rebound increasing by 23% IN 4Q09 against decline of 2% in 4Q2008.^[12]Total advances grew 26.1% y-o-y to Rs 1,447 billion. Advance growth is healthy and is above industry growth; however it has significantly slowed down from its earlier quarter of 32% (3Q09).

Due to its tactful operational management, the bank has done well in reducing its cost to income ratio to 36.20% in FY2009 from 41.50% in 2008, which made them to achieve net income growth of 49.07%.When other large nationalised banks saw moderate increase in Net Interest Margin (NIM), Bank of India saw an muted increase in its NIM's to 2.97% in FY2009 from 2.95% in FY2008 due to significant rise its cost of fund by 30 bps to 5.37% in FY2009 compared to FY2008.^[13]

Bank of India Total Revenue and Operating Profit by business segment in 2008-2009.

Business Segments

Wholesale Banking (41.5% of Revenues, 74.93% of Operating Profit)

In FY09, the Wholesale banking contributed the highest revenue as well as operating income to the total revenue.The Wholesale bank provides services such as working capital finance, trade services, transactional services, cash management to large, mid & small sized corporates and agri-based businesses.In FY09, Total Revenues from wholesale banking grew by 86.20% to Rs. 80.62 billion compared to Rs. 43.28 billion in FY08.^[14] Total advances to large corporate entities were increased to 562.28 billion, an increase of 34.70% from FY08. Total advances to Small and medium enterprises (SME) also grew by 24.71%, to Rs. 254.41 billion. Both SME and corporate advances of the bank consist of over 70% of the Bank’s total advances portfolio. Operating profit from this segment rose over 310% to Rs. 31.20 billion in FY2009, from 7.61 billion in FY2008.^[14]

Retail Banking (31.10% of Revenues, 25.12% of Operating Profit)

The bank offers residential mortgages loans, business mortgage loans, auto finance, educational loans among other types of loans. In the FY2009, retail banking revenue of the Bank decreased by 5% to Rs. 60.33 billion and made up for over 31% of the bank’s total revenue. However Its operating profit decreased by 48% to Rs. 10.45 billion, compared to Rs. 20.06 billion in FY08.^[14]

At the end of the FY2009, total retail advances portfolio stood at Rs. 174.01 billion, which was up by 6.84% from 162.87 in FY2008 and constituted over 15% of total advances at that date. Retail advances segment growth has slowed down considerably due to reduction in commercial real estate exposure by over 27% y-o-y. In general the bank is consistently improving its lending activities towards Auto Financing and Educational Loans which have grown by 50% and 30.50% respectively in FY2009.

Treasury (27.0% of Revenues, 13.23% of Operating Profit)

Advances Portfolio Distribution (as on 31st March, 2009)

The bank’s treasury operations include dealing in government and other securities, money market Operations and Forex Operations. In FY2009, Treasury operations revenue of the Bank increased by 39% to Rs. 52.36 billion, from Rs. 37.77 billion in 2008.Operating profit from treasury operation grew over 70% from Rs. 3.25 billion in FY2008, to Rs. 5.51 billion in FY2009.^[14]

Other Banking Businesses (0.5% of Revenues, 13.24% of Operating Profit)

Revenue from other banking operations increased by 17% to Rs. 88.11 billion in FY2009, from Rs. 75.17 billion recorded in FY2008. However, Operating loss from other banking businesses declined by 35.63% to Rs. 5.52 billion in FY2009, from Rs.4.07 billion in FY2008.^[14]

The Bank has a public holding (other than promoters) of 35.53%, including 14.33% held by foreign institutional investors. As on March 31, 2009, promoter shareholding in the bank was 64.47%.^[15]

Key Trends and Forces

Conservative approach and RBI overseeing aids Public Sectors Unit (PSU) bank to grow even in a slowing economy

PSU banks come under the purview of RBI and they have to follow the diktat of the RBI closely. This has resulted in the banks being conservative in their lending, which many had criticized for the slow growth of the Govt. banks during the boom period of 2005-2008 compared to the private banks.In the past, Private and foreign banks advances growth has outpaced the growth by PSB's, Deposits of private sector banks grew at a CAGR of 26% during FY04 – FY08, as against an overall CAGR growth of 20.5% by all SCBs. Advances of private sector banks grew at a CAGR of 32% as compared to a CAGR of 30.1% by all SCBs for the same period. In hindsight, sticking to the RBI norms has helped the PSU banks in having a good quality loan book and easing pressure on their loan book compared to their private peers. In fact, for the fiscal year till March 27, 2009 PSU banks managed to grow their loan book at 20.4% over the previous year compared to 10.9% for private banks and 4% for foreign bank.^[16] Bank of India on its part grew faster than the industry at 26.08%.^[17]

Government banks are managing their NPAs proactively

Diverging trends in NPAs among public sector and Private sector banks^[18]

With rising defaults due to a slowing economy, Govt. banks have stepped up their NPA management. The PSU banks have been closely monitoring its loan book and restructuring them to prevent NPA from going out of control. In 2008-09, some of the largest private banks have seen their gross non-performing assets as a proportion to their gross advances going up by 21-100 basis points largely due to higher exposure to retail lendings. ICICI Bank has seen the sharpest increase in its gross non-performing asset (GNPA) proportion, more than one percentage point to 4.33%. In contrast to the rising trend in private banks’ NPAs, leading government-owned banks in fact showed fall in gross NPA proportion. Oriental Bank of Commerce has seen the sharpest decline in gross NPA (fall of 78 bps to 1.53%)^[19]. A higher exposure to corporate credit and more conservative lending during a booming economy may have aided lower NPAs for some of these banks. Under the able guidance of RBI, these banks have decentralized their credit and recovery team and this has helped these banks in proper monitoring of accounts and keeping NPAs at low levels. Bank of India on its part had decentralized the credit management system to ensure efficiency and effective monitoring.^[20] In 4QFY09, Bank of India proactively restructured 3.6% of loans. This, the bank believes will enable it to manage the risks of default better. Bank of India’s overall NPAs are much lower than the industry. As of March 2009, the bank had Net NPAs of 0.44% down 8bps from 0.52% as on March 2008.^[21]

Public Sector Unit (PSU) Banks are getting competitive

PSU Banks are excessively dependent on the interest income and constitues as much as 82-90% of their total income as compared to 60-70% earned by Private players. This has increased competition pressure at the time when there is increased uncertainty in interest rate. Fee based income, a constituent of non interest income, of private sector banks grew at a CAGR of 45% between FY04 – FY08, outperforming its foreign and public sector peers whose fee based income grew at a CAGR of 35% and 18% respectively for the same period. With the increase in the competition, Over the last couple of years, fee based services have been an area of focus for private banks, which have looked to increase their presence in areas like investment banking and M&A deals, services. ^[22] Bank of India, on its part has introduced a host of consumer friendly services like, bill pay, air and rail ticket booking, e-remittance, online share trading to name a few. ^[23] Also, Keeping future growth in mind the bank has entered into a joint ventures for its insurance business, acquired an Indonesian Bank and made strategic investments in MCX (Leading commodity exchange), ASREC (Asset Reconstruction Company) and CIBIL (Credit Information Bureau). ^[24]

Competition

• State Bank of India - State Bank of India, a public sector bank, is the largest bank in India. Besides personal and corporate banking, SBI is also involved in NRI (Non Resident Indian) services through its network in India and overseas. Its 11,000 branches and 5,600 automatic teller machines give it a reach throughout the length and breadth of the country; its work force of 200,000 dwarfs all other banks in India.^[25]

• ICICI Bank – ICICI Bank is India's largest private sector bank and second largest overall in terms of assets. Together with its subsidiaries, ICICI Bank offers a complete spectrum of financial services and products ranging from commercial banking to investment banking, mutual fund to insurance. The bank, headquartered in Mumbai, has a network of about 1,400 branches and 4,530 ATMs in India and a presence in 18 countries. ICICI Bank is also the largest issuer of credit cards in India.

• Punjab National bank - Punjab National Bank (PNB) is the second largest government-owned commercial bank in India with about 4,500 branches across 764 cities. This financial institution offers services in personal and corporate banking, including industrial, agricultural, and export finance, as well as international banking. It competes with Bank of India mostly in retail lending and wholesale businesses.^[26]

• HDFC Bank - Housing Development Finance Corporation Limited Bank Limited or HDFC Bank is one of the largest private banks in India.^[27] The company competes with Bank of India in each segment, over a wide range of banking services covering commercialand investment banking on the wholesale side and transactional/branch banking on the retail side.^[28] HDFC's Standard Life Insurance company competes with ICICI's insurance subsidiaries. Their mutual fund and asset management businesses are also in direct tussle.

• Bank of Baroda - Bank of Baroda is another private player. It has an edge over Indian Bank due to its rich countrywide network of over 2800 branches. It also has significant international presence with a network of 74 offices in 25 countries.^[29]

As per RBI 2007-2008 annual data, SBI & Associates shared over 23 % market share by deposit followed by the largest private sector lendor, ICICI Bank captured 7.36%.Bank of India Placed at sixth place with 4.52% of total deposits as on 31st March, 2008

Market Share by Total Deposits as on 31st March, 2008.^[30]

All figures are as on 31st March, 2008 as per the respective Company's annual report.

References

1. ↑ ^{1.0 1.1} Biousa homepage
2. ↑ Bank od India website
3. ↑ ^{3.0 3.1} Press release for quarter and year ended March, 2009, Page 1
4. ↑ Annual Results – Investor Presentation, Slide 232
5. ↑ Money Today
6. ↑ Annual Results – Investor Presentation, Slide 3
7. ↑ Annual Results – Investor Presentation, Slide 3
8. ↑ Bank of india Website - History
9. ↑ Press release for quarter and year ended March, 2009, Page 3
10. ↑ ^{10.0 10.1} Annual Results – Investor Presentation, Slide 23
11. ↑ Annual Results – Investor Presentation, Slide 13
12. ↑ Khandwala SecuritiesLimited - Bank of India 4Q09 update, Page 1
13. ↑ Sify- NPAs of pvt banks rise publicsector banks witness decline
14. ↑ ^{14.0 14.1 14.2 14.3 14.4} Press release for quarter and year ended March, 2009, Page 2
15. ↑ Annual Results – Investor Presentation, Slide 7
16. ↑ Business Standard - General
17. ↑ Annual Results – Investor Presentation, Slide 7
18. ↑ The Business Line
19. ↑ The Business Line - NPAs of pvt banks rise, public sector banks witness decline
20. ↑ Standard - Govt. Banks to keephawks eyenpas
21. ↑ Annual Results – Investor Presentation, Slide 7
22. ↑ Economic Times
23. ↑ Bank of India Website
24. ↑ PRESENTATION Mar09new.pdf Annual Results – Investor Presentation, Slide 13
25. ↑ Businessworld article on SBI
26. ↑ Punjab National Bank profile on Hoover's
27. ↑ HDFC Bank website
28. ↑ Livemint news article on HDFC
29. ↑ Bank of Baroda website
30. ↑ Reserve Bank of India - A Profile of Banks : 2007-2008