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Nothing to alter a reasonably stable outlook

Result Highlights

* Asset quality: Gross NPA additions were to Rs 43.52bn (annualized NPA addition ratio of 1.7%) and recoveries and upgrades were also healthy at Rs 25.99bn

*  Margin picture: Global NIM at 3.02% de-grew -6bps/-2bps QoQ/YoY as the fall in yield on advances QoQ was higher than the fall in cost of deposits

* Asset growth: Whole bank advances grew 2.6%/18% QoQ/YoY driven sequentially by domestic retail and international loans

* Opex control: Total opex fell/rose -0.1%/6.6% QoQ/YoY, employee expenses rose/fell 12.6%/-0.5% QoQ/YoY and other exp. fell/rose -12.4%/17% QoQ/YoY

* Fee income: Commission, exchange and brokerage de-grew/grew -23%/14.4% QoQ/YoY, driven sequentially lower due to seasonality in business

Our view – Nothing to alter a reasonably stable outlook

A little less than a fourth of slippages emerged from the restructured book: The slippage from the restructured book amounts to about Rs 10bn for the quarter. The bank had guided for a fresh slippage ratio of 1.5-2% and the fresh slippage ratio for 1QFY23 has been 1.7%. Provisions were Rs 16.8bn, down by -54.9% QoQ. Provisions were under control since the bank had already made accelerated provisions last financial year. Management guided that credit cost would be 125-150 bps in FY23 and there could be improvement on this guidance but the bank would make a fresh comment only after observing improved traction. The all-inclusive standard restructured book is Rs 196.66bn and about 15% of this book is under stress and is generally tagged SMA1/2.

There is still a substantial amount of loans that are at sub-optimal pricing and these would be repriced higher: Furthermore, changes in loan book mix in favour higher-yielding loans such as personal loans would also aid net interest margin. NIM was at 3.02% for the quarter compared with 3.08% for 4QFY22 and 3.04% in 1QFY22. Management reiterated prior guidance of improving NIM by 10 bps from the level seen at the end of FY22

Management had indicated that it would be able to grow corporate loan book better, while maintaining margin, which is something that is now being seen: Domestic corporate loan book has grown 17% YoY and 0.7% QoQ. The international loan book, which is a wholesale loan book, has grown 31% YoY and 7.7% QoQ as the bank finds it a profitable business to do. Overall, retail loans have grown 23% YoY and 5.1% QoQ whereas overall agri loan growth was 14% YoY and 1.0% QoQ. While the industry is expected to grow at 10-12%, management guided that the bank can grow at or slightly better than the industry, while maintaining or slightly improving upon margin.

We maintain ‘Buy’ rating on BOB with a revised price target of Rs 150: We value the bank at 0.7x FY24 P/BV for an FY23E/24E/25E RoE profile of 10.6/12.3/12.9%. We assign a value of Rs 9.1 per share to the subsidiaries, on SOTP.

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