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Strong pickup in loan growth; lower provisions drive earnings

Asset quality outlook improving; restructured book stands at 2.95%

* BOB reported a strong earnings performance, supported by lower provisions and higher other income, even as NII remained under pressure. Domestic NIM moderated by 22bp QoQ to 2.9%. Business trends, however, improved, with advances growing at 4% QoQ.

* Asset quality witnessed an overall improvement. Fresh slippage stood at INR52.2b (annualized slippage rate at 3%). However, higher write-offs and recoveries resulted in an improvement in asset quality. The GNPA/NNPA ratio declined by 75bp/20bp QoQ, while PCR was stable ~67%. Total SMA 1/2 (over INR50m) declined to 1.87%, while the restructured book stands at INR205b (2.95% of loans). Collection efficiency (excluding Agri) improved to 96% in Sep’21 v/s 93% in Jun’21.

* We increase our FY22E/FY23E earnings estimate sharply by 39%/14% and expect a RoA/RoE of 0.7%/10.9% by FY23E. We maintain our BUY rating.

Domestic margin contracts by 22bp QoQ to 2.9%

* BOB reported a PAT of INR20.9b (significantly above our estimate), aided by lower provisions, which declined 31% QoQ to INR27.5b, while operating performance remained healthy. NII grew 2% YoY (down 4% QoQ, a 6% miss), impacted by interest reversals. Domestic NIM moderated by 22bp QoQ to 2.90%. Over 1HFY22, NII/PPOP grew 9%/20% and PAT rose 305% YoY to INR32.9b.

* Other income grew 23% YoY and 25% QoQ to INR35.8b, supported by a pickup in fee income (+20% QoQ), healthy recoveries from written off accounts, and strong treasury income (INR12.2b). OPEX grew 10% YoY to INR54.8b. C/I ratio rose to 49.1%. PPOP grew 6% YoY to INR56.7b (6% beat).

* The bank availed the option to defer increased family pension cost of INR14.5b over a five-year period, and provided INR1.45b over 1HFY22.

* Growth in advances picked up by 4% QoQ and 3.6% YoY. Among segments, Retail growth stood at 10.3% YoY and 3.1% QoQ, while the Corporate book grew 6% QoQ (flat YoY). The SME/Agri book grew 2%/4% QoQ. Within Retail, Home/Auto grew 1.5%/4.5% QoQ. Deposit growth was flat YoY (+3% QoQ). CASA grew 14.2% YoY, and domestic CASA ratio stood at 43.5%.

* On the asset quality front, fresh slippages stood at INR52.3b (annualized slippage rate at 3%), led by Corporate and SME. However, higher write-offs and recoveries resulted in an improvement in asset quality. The GNPA/NNPA ratio declined by 75bp/20bp QoQ to 8.11%/2.83%. PCR stood broadly stable ~67%. Total SMA 1/2 (over INR50m) exposure declined to 1.87% (v/s 2.68% in 1QFY22), while the total restructured book stood at INR205b (2.95% of loans). Collection efficiency (excluding Agri) improved to 96% in Sep’21 v/s 93% in Jun’21.

Highlights from the management commentary

* Restructured book breakup: Retail (INR67b), MSME (IN54b), Corporate (INR74b), and others (INR9b) including the international book.

* The bank’s exposure towards SREI Infra stands at INR20b, of which it has provided 50%.

* The management remains on track to achieve its guided credit cost of 1.5-2% and slippage ratio of 2% in FY22.

Valuation and view

BOB reported a strong earnings performance, supported by lower provisions and higher other income, even as NII remained under pressure. Domestic NIM moderated by 22bp QoQ to 2.9%. Business trends, however, improved with advances growing at 4% QoQ, led by the Corporate and Retail book. The management expects the growth momentum to continue, led by the Retail segment, while the Corporate book continues to see a gradual recovery. The bank reported an improvement in asset quality, with CE increasing to 96%. SMA 1/2 declined to 1.87% of loans. We increase our FY22E/FY23E earnings estimate sharply by 39%/14% and expect a RoA/RoE of 0.7%/10.9% by FY23E. We maintain our BUY rating with a revised TP of INR130 per share (0.9x Sep’23E ABV).

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