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Retail growth re-accelerating; lower provisions drive strong earnings beat

* BOB has reported a strong earnings beat with PAT at Rs10.6bn mainly due to healthy NIMs, higher treasury gains and contained provisions (including Rs3.7bn on potential interest reversals on proforma NPAs).

* Overall loan growth remains moderate at 7% yoy, but retail growth is accelerating, led by mortgages/auto. With integration related issues and big scare on asset quality easing, the bank plans to accelerate growth, mainly driven by retail and some back-end support from quality corporates.

* BOB has reported proforma GNPA ratio at 9.6% and restructured pool at ~2%, which is slightly better than expectations. The bank has also built in a reasonable provisioning buffer – 0.48% of loans, which is reasonably higher among PSBs and thus comforting.

* We retain Buy on BOB with a TP of Rs85 (based on 0.6x FY23 ABV) given its high retail orientation should drive better growth/core NIMs, reasonable capital position and favourable risk-reward at current valuations.

Near-term pressure inevitable, but accelerating retail growth should structurally support NIMs in long run: Loan growth stood at 7% yoy, driven by retail/agri book (up 14%yoy/4.5%qoq) and corporate loans (up 7.2% yoy/ 6.6%qoq). Deposit growth stood at 6.5% yoy, aided by healthy growth in domestic CASA. Domestic CASA ratio remains healthy at 41.2% (up 240bps yoy). Domestic NIM is up 11bps qoq to 3.1%, mainly due to lower interest reversal on NPAs, better LDR and better spread supported by lower CoF (COD down 15bps qoq). However, NPA formation in international book led to stable global NIM at 2.9%. That said, NIM in Q4 could slip qoq due to interest reversal on NPAs. Going forward, the bank plans to focus on loan growth mainly led by retail and would not chase deposits in excess of loan growth, leading to better LDR and margins.

Higher provisioning buffer comforting: Reported GNPA ratio was down 66bps qoq to 8.5% due to SC stay on NPA tagging, while proforma GNPA too was moderate at 9.6% (9.3% in Q2FY21). Overall gross slippages of Rs117bn included proforma NPAs for Q2/Q3 and Rs39.8bn from international book, consisting of two accounts that the bank is likely to restructure soon. Overall restructuring pool stands at Rs137bn (2% of loans), including Rs95bn (Rs77bn being corporate) under the RBI RE scheme and cumulative MSME restructuring of Rs42bn (0.6% of loans) under the old Jan’19 circular. Overall SMA1& 2 pool stands at 4.4% (3.6% ex-restructuring), up from 2.9% in Sept’20 and indicating additional asset quality risk in Q2. That said, the bank now holds a Covid-19-related provision buffer of Rs36bn (0.48% of loans), including Rs17bn (0.24% of loans) being contingent.

Outlook and valuations: We upgrade our FY21/FY22 earnings estimates, factoring in higher other income and lower LLP. Retain Buy with a TP of Rs85 (based on 0.6x FY23 ABV) as given its higher retail orientation should drive better growth/core NIMs, reasonable capital position and favourable risk-reward at current valuations. Key risks: Higher NPA formation, mainly in corporate/SME book; and slower-than-expected growth trajectory.

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