Sharp decline in Bank of India's net interest margin (NIM), for the second quarter in a row, asset quality slippages and jump in provisions (predominantly from treasury investments) took a toll on its financials.

According to the Bloomberg consensus estimates, the net profit was expected to be Rs 727 crore of profits during June 2011 quarter, however, BoI reported Rs 517 crore in profits.

Unsurprisingly, the stock reacted negatively to the results and shed 2.9 per cent on a day when the BSE Sensex was up marginally .

Margins

The net profit of the bank declined 29 per cent year-on-year. Thanks to a sharp fall in NIM from 2.94 per cent in the quarter ended March 2011 to 2.19 per cent during the June 2011 quarter.

A sharp fall in domestic NIM (95 basis points fall sequentially) led to lower net interest income. The reason for the fall in margin can be attributed to high proportion of deposits which came up for maturity June quarter. According to BoI's annual report, 27 per cent of the total deposits were to mature during the quarter ended June 2011. In order to service these, the bank may have had to raise deposits at higher rates.

Added to this was the high rate on savings bank accounts which affected the whole banking system. Around 24 per cent of the bank's total deposits were savings bank deposits.

Additionally, the domestic yield on funds declined even as the cost of funds rose sharply.

This was because of lower yields on investments which form a significant chunk of Bank of India's book. The domestic credit-deposit ratio of the bank is lower than the industry, at just 65 per cent. The yield on funds for overseas business also declined.

The gross NPA (non-performing assets) ratio rose from 2.23 per cent in March to 2.69 per cent in the June quarter.

Asset quality

Higher slippages in the agriculture portfolio and higher proportion of restructured assets turning bad led to the jump in NPAs. As a proportion of total restructured assets, NPAs rose from 17 per cent to 21 per cent sequentially.

It was the mark-to-market provisioning on available-for-sale securities which played spoil sport. Provisions for investments have more than doubled during the June quarter compared with a year ago.

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