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Select PSU banks continue their onward march

Result Highlights

* Asset quality: Gross NPA additions were at Rs 44.65bn (annualized NPA addition ratio of 2.1%) and recoveries and upgrades were higher at Rs 53.60bn

* Margin picture: Global NIM at 3.33% grew 31bps/48bps QoQ/YoY as the rise in yield on advances QoQ was much higher than the rise in cost of deposits

* Asset growth: Whole bank advances grew 4.0%/19% QoQ/YoY driven sequentially by domestic retail and international loans

* Opex control: Total opex rose 8.7%/9.0% QoQ/YoY, employee expenses rose 4.6%/2.2% QoQ/YoY and other expenses rose 13.7%/18% QoQ/YoY

* Fee income: Core fee income grew 18.7%/1.1% QoQ/YoY, driven sequentially by Commission, exchange and brokerage fee

Our view – Select PSU banks continue their onward march

Management seemed to allude that near-term risk to margin compression was low since yield expansion would continue to outpace rise in deposit cost: The bank would maintain discipline in terms of deposit rates repricing. On the yield front, most of the corporate book is on MCLR, where the re-pricing has not been meaningful yet. Furthermore, pricing power in the corporate segment continues to improve and will also lead to improvement in loan yield. While the whole-bank credit deposit ratio was 80%, the domestic credit deposit ratio was lower at 73% and hence, has headroom to move up. The bank had guided that FY23 NIM would be about 10 bps higher than FY22 NIM and management stated that this still holds or can be slightly improved upon.

Management stated that BoB would grow at the industry level, which itself translates to an enhancement of growth guidance: Domestic corporate loan growth, which is 10.5% YoY, has substantial scope for improvement as pricing power returns. Domestic retail loans are already growing at a healthy pace of 28% YoY. Overall bank loan growth was 19% YoY, within which domestic advances grew 15% YoY and international advances grew 42% YoY. On net basis, after factoring in improved NIM (1.3% earlier vs >2% now) and low cost to income ratio (<20% vs 50% for domestic business), the international business is more profitable than the domestic business and hence, this business is attractive to grow.

There is a moderate enhancement to the credit cost guidance: Earlier, the bank had been guiding for a credit cost of 125-150 bps. Now, credit cost for the year would be in the range of 120-125 bps. For the quarter, there was a largish slippage in the overseas book, which was not a negative surprise as this was a partially provided for restructured account, which is now fully provided for.

We maintain ‘Buy’ rating on BOB with a revised price target of Rs 180: BoB is placed 5 th in our pecking order for banks. We value the bank at 0.8x FY24 P/BV for an FY23E/24E/25E RoE profile of 10.7/12.6/13.4%. We assign a value of Rs 9.1 per share to the subsidiaries, on SOTP.

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