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Result Highlights

* Asset quality: Gross NPA additions were at Rs 27.44bn (annualized NPA addition ratio of 1.2%) and recoveries and upgrades were healthy at Rs 28.02bn
* Margin picture: Global NIM at 3.53% grew 16bps/45bps QoQ/YoY, sequentially higher as the yield on advances moved faster than the cost of deposits
* Asset growth: Whole bank advances grew 4.9%/18.5% QoQ/YoY driven sequentially by International loans, Retail and MSME
* Opex control: Total opex rose 12.7%/25.8% QoQ/YoY, employee expenses rose 12.9%/39.8% QoQ/YoY and other expenses rose 12.5%/12.3% QoQ/YoY
* Fee income: Core fee income grew/de-grew 11.4%/-7.3% QoQ/YoY, driven sequentially by Commission, Exchange, Brokerage fee income

Our view – Nothing to derail investment thesis

Management has clarified that, even if ECL is allowed, credit cost would remain contained within 100 bps: The normalized credit cost for the bank is 100 bps and the bank is running below this right now. The ECL provision is currently estimated to be 1- 1.5%. We presume that this is the incremental impact and would be spread over 5 years. Further, in FY24 also, the recoveries and upgrades, including recoveries from written off accounts, would outstrip slippages. The CRILC SMA, which used to be 2% is now as low as 32 bps. The restructured book amounts to about Rs 160bn.

Management stated that the bank would grow 1-2% points faster than the banking system in FY24: The internal forecast for banking system growth is 11-13%. It is part of bank strategy to grow the retail book faster than corporate book. To achieve an overall growth of say x%, the retail loan growth would be 1.5x%, whereas the corporate loan growth would be 0.7x%

Management guided that the bank would be able to sustain or slightly improve the full year FY23 NIM in FY24: The domestic credit to deposit ratio is below 75% and there is no liquidity pressure on the bank. Most of the term deposits growth has come from deposits with tenure of 399 days or lower. This is a conscious decision since, as the rate cycle turns, these deposits can be run down quickly and renewed with lower cost deposits. The capital adequacy will be able to support growth in FY24 without equity capital raise.

We maintain ‘Buy’ on BoB with a revised price target of Rs 260: We value the bank at 1.2x FY24 P/BV for an FY24E/25E RoE profile of 14.8/16.3%. We assign a value of Rs 13 per share to the subsidiaries, based on SOTP.

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