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Margin dips, but higher other income, lower provisions drive earnings beat

* Despite lower growth/NIM, BOB reported a strong beat on PAT at Rs21bn (est. Rs10bn), mainly aided by higher other income, DHFL recovery of Rs8.8bn and contained provisions. The GNPA ratio improved by 76bps qoq to 8.1%, while the standard net restructured book rose marginally to 3% of loans (2.9% in Q1).

* Credit growth was moderate at 4% yoy due to the corporate drag and the bank’s conscious stance on retail/SME amid Covid. However, management expects growth to improve as risk aversion recedes in retail/SME, while corporate limit utilization and fresh growth pick up in H2, typically a busy season.

* BOB has recognized Srei Infra exposure (PCR at 50%) and made Rs6bn of contingent provisions on 3 lumpy corporate a/cs in stress (2 from power sector). This, coupled with moderate stress formation/better recovery in H2, should keep LLP contained. Factoring in better margins/lower LLP, we upgrade FY22E/23E/24E EPS by 25%/11%/6%.

* We expect BOB’s RoE to gradually improve to 10-12% over FY23-24E from a low of 1% in FY21, reflecting better growth, margins and asset quality trajectory. Retain Buy with a revised TP of Rs130 based on 0.8x Dec’23E ABV (vs. 0.6x Sep’23E ABV).

Better growth in H2 to support NIM uptick:

Overall credit growth was moderate at 4% yoy to Rs6.9bn due to corporate drag and sub-par retail growth. Within retail, mortgage growth was relatively slower, while PL was up 33% yoy and auto was up 23% yoy. Growth in gold loans was also strong at 147% yoy, albeit on a low base. According to management, corporate is seeing a pickup in Q3 with decent brownfield and working capital expansion proposals in the pipeline. The domestic CASA ratio improved slightly to 43.5%. However, slower growth and interest reversals led to a 19bps qoq compression in NIM to 2.9%. Going forward, the bank plans to improve growth/LDR, which, coupled with better traction in retail and lower interest reversals, should improve NIMs.

NPAs down qoq as slippages moderate; better recoveries to further drive down NPAs:

Fresh slippages were relatively contained at 3% of loans (despite recognition of SREI – Rs20bn; 50% provided). This supported by healthy recoveries led to a 76bps decline in the GNPA ratio to 8.1%. The standard net restructured pool (including MSME) slightly inched up to Rs205bn/3% of loans vs. 2.9% in Q1, while the SMA 1 & 2 pool (>Rs50mn) declined to 1.9% (vs. 2.7% in Q1). BOB has proactively done some contingent provisions of Rs6bn on 3 lumpy corporate a/cs in stress (2 from power sector) and expects strong recoveries of Rs70- 80bn in H2FY22.

Outlook and valuations:

BOB remains well-capitalised with Standalone Bank CET 1 of 11.4% and easing asset quality stress, which is expected to accelerate growth. This should drive up margins, which, coupled with lower LLP, should lead to gradual improvement in its RoE trajectory to 10-12% over FY23-24E from a low of 1% in FY21. Retain Buy with a revised TP of Rs130, based on 0.8x Dec’23E ABV. Key risks: higher NPA formation, mainly in the corporate/SME book; and slower-than-expected growth trajectory.

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