Bank of Maharashtra: Bank On It

What everyone was waiting for has finally happened. After dilly-dallying on the rate cut front for a long time, the RBI has finally slashed the repo rate by 50 basis points to eight per cent in its recent monetary review meeting. This, we believe, makes the banking space look promising and hence, a good investment area. However, with non-performing assets (NPAs) being a major concern, one needs to be very stock specific while taking exposure in this sector. In such a scenario, private sector banks would be a preferred choice. In this light, our selection of Bank of Maharashtra (BoM), a public sector bank, as the Low Priced Scrip recommendation for this issue could be a little surprising.

So, why have we selected BoM? For starters, the bank does not feature in the list of PSBs that are facing serious headwinds on the Net Interest Margin (NIM) front as well as other worrisome factors such as asset quality deterioration, etc. In fact, it has seen a decent growth in its business over the past. As on 31st December, 2011, the bank’s deposits have registered an increase of 11.43 per cent to Rs 69926 crore while the advances grew by 16 per cent to Rs 50751 crore. On the deposits front, BOM is growing at a lower rate than the RBI’s projection but its advances are in line with the RBI’s projection for FY12. Further, the share of the CASA to the total deposits increased by 79 basis points to 41.01 per cent. It is very good to see that the bank has more of CASA, which are considered low cost deposits in this high interest rate scenario.

• The bank does not feature in the list of PSBs facing serious headwinds on the NIM front as well as other worrisome factors such as asset quality deterioration, etc.
• The bank has more of CASA, which are considered low cost deposits in this high interest rate scenario.
• At a time when most banks' NIM was hit and their NPAs increased, BOM’s NIM increased by 31 basis points and the Net NPAs decreased by 131 basis points YoY in Q3FY12.

In the past, when the interest rates inched higher, the NIM of most banks was impacted and their Net NPA levels moved higher, affecting the growth and outlook. However, for BOM, the NIM increased substantially by 31 basis points to 3.28 per cent in the Q3FY12. This was due to the better yield it earned on its advances. The bank’s yields were up by 197 basis points to 11.76 per cent on a YoY basis. Its Net NPAs for Q3FY12 decreased by 131 basis points to 0.54 per cent on a YoY basis. The provision coverage ratio stood at 85.96 per cent against 60.02 per cent during the same period last year. A higher provision coverage ratio reduces the risk of a rise in NPAs in the coming quarters to some extent.

*CMP as on Apr 17, 2012

As with most of the PSU banks, BOM too had issues on the capital infusion part, but this was solved as the government and the Life Insurance Corporation (LIC) infused funds into the bank. BOM issued around 15 crore and two crore shares at Rs 56.09 respectively to both of them. Hence, it may see an improvement in its Capital Adequacy Ratio (CAR), especially in the Tier 1 CAR, in the March quarter results. At their current market price, the shares are trading below the price at which they were issued to the government and the LIC, which further makes it an attractive buy proposition.

The dividend yield of BOM stands at 3.68 per cent. This is very good for investors, as it gives an additional return over the usual capital appreciation of the share price. On the valuations front, the bank is available at a Price to Earning (P/E) multiple of 6.12x and a Price-to-Book value of around 0.75, which looks pretty decent. We believe that this would help OM perform better going ahead.