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Higher provisions for employees' retirement benefits and shrinkage in net interest margin (NIM) on a sequential basis caused the net profit of Bank of India (BOI) to fall significantly during the quarter ended March 2011 compared with the December 2010 quarter.
While the jump in provisions was expected, following the RBI directive to reopen the pension option to employees, the quantum surprised the market.
On a day when the BSE Bankex was already under pressure (down 2 per cent) on fears of further monetary tightening in the upcoming credit policy, BOI's lower-than-expected profit (higher than expected provisioning over next four years) saw the stock shed as much as 7.73 per cent in Monday's trade.
More than expected
Bloomberg consensus estimates expected the net profit for the quarter at Rs 675 crore whereas the actual net profit was only Rs 493 crore.
This is attributable mainly to provisioning of Rs 985 crore for employee retirement benefits during this quarter, much higher than market expectations.
This includes a one-time provision for pension scheme of retired employees as well.
The gratuity and pension for existing employees will continue for another four years which will be to the tune of Rs 572 crore every year.
The future provisioning for employees accounts for 15 per cent of the existing net worth (Rs 15,499 crore).
Save for the enhanced employee provisions, financial parameters of the bank showed an improvement. The NIM improved from 2.57 per cent in March 2010 to 2.94 per cent in March 2011. The gross non-performing asset (NPA) ratio fell to 2.23 per cent from 2.36 per cent in December 2010 and from 2.85 per cent in March 2010.
Additionally, the provisions for NPAs during the quarter have almost halved year-on-year.
The net profit of BOI improved by 15 per cent year-on-year while it fell by 25 per cent sequentially.
Outlook
BOI is one of the few banks which saw its domestic deposit growth (26 per cent) outpacing advances growth (22 per cent). The credit-deposit ratio of the bank as of March 2011 was at 72 per cent, which is lower than not only the ratio it has been maintaining since 2007-08 but also the prevalent ratios in the banking system .
This indicates that the bank is well-positioned to increase its lending while not raising deposits at high costs. Moderation in short-term borrowing rates will also help the bank.
While the bank's NIM had peaked in December 2010 (3.49 per cent domestic NIM), it is well-positioned to maintain NIM at levels seen in the March 2011 quarter.
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