The Hindu Business Line : Bank of India: Good investment option

FRESH investments can be considered in the stock of Bank of India. The stock is attractively valued at present levels and it holds the potential to offer returns commensurate with risk at the ruling price of Rs 32.80.

The Bank of India stock is attractively valued in terms of most valuation measures. The price-to-earnings multiple of the stock is less than 3. The stock is trading at a discount of more than 50 per cent to its book value. The dividend yield of the stock is around 7.6 per cent (based on a dividend per share of Rs 2.50, which is maintainable). These factors suggest that the downside is limited.

The upside potential for the stock is dependent on reduction in non-performing assets. Large non-performing assets are a reason why its stock price has not appreciated as much as that of Punjab National Bank, Bank of Baroda and SBI. A net non-performing asset to advances ratio of 6 per cent is the highest among large banks.

There are, however, a few positive factors. The ratio of non-performing assets is declining on the back of improvement in profitability. Operating profits have improved by 36 per cent in the nine-month period ended December 2002. This has been utilised by the bank to maintain large provisions, which will help in bringing down further the ratio of non-performing assets.

The bank also has one of the lowest costs of deposits in the industry. If the accretion to non-performing assets can be contained, then the advantage of low-cost deposits would help in boosting profit growth. These factors along with its valuation favour an investment in the stock.

Similar to most banks, Bank of India's earnings is also vulnerable to a rise in interest rates. In addition, lower interest rates without any improvement in credit offtake could constrain spreads and profitability a couple of years later. However, if non-performing assets were brought under control, the company would be able to meet these challenges better. That could generate stock price appreciation.

Suitability: Prices of bank stocks have been relatively more volatile in recent times. They are still less volatile relative to the S&P CNX Nifty Index. This is true of Bank of India stock too. This trend of relatively lower volatility, representing lower risk, is expected to continue in future.

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