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Soft quarter not structural, buy into weakness

Result Highlights (See “Our View” below for elaboration and insight)

* Asset quality: Gross NPA additions were at Rs 47.51bn (annualised NPA addition ratio of 1.9%) and recoveries and upgrades were Rs 22.07bn

* Margin picture: Global NIM at 3.07% declined -20bps/-26bps QoQ/YoY, sequentially lower due to rise in cost of deposits

* Asset growth: Whole bank advances grew 3.4%/17.3% QoQ/YoY driven sequentially by International loans, Retail loans and MSME loans

* Opex control: Total opex rose 7.5%/17% QoQ/YoY, employee exp. fell/rose - 1.3%/16.4% QoQ/YoY and other expenses rose 19.5%/17.6% QoQ/YoY

* Fee income: Core fee income grew 32.4%/31.7% QoQ/YoY, driven sequentially higher by commission, Exchange, Brokerage segment

Our view – “Higher for longer” bites but only just

NIM guidance for FY24 stands revised ~15 bps lower, given the view on interest rates stands altered: The NIM guidance now stands revised to 3.15% plus minus 5 bps, which is ~15 bps lower than the earlier NIM guidance of 3.3%. The macro view is that elevated interest rates will continue for a while, which is a change from the earlier view when it was expected that rates would decline in 2H. In a scenario of short-term reversal in rates, BoB would have been a key beneficiary as high-cost short-term bulk deposits would be running off at the opportune moment and get replaced at lower cost but that is not the base case now. On the positive side, there is still some residual upward repricing of MCLR book, which comprises as much as 52% of loan book. Furthermore, domestic loan to deposit ratio is still low at 70%, which is expected to be increased.

Asset quality outcomes were only optically weak and not a cause for any concern:A large aviation account (presumably Go First), amounting to Rs 17.73bn, slipped during the quarter. Excluding this account, the gross fresh slippage ratio amounted to 1.08%, up 2 bps QoQ and within guidance. Recoveries were healthy for the quarter at more than Rs 12bn but included one-offs worth Rs 4-5bn, including an IL&FS account. However, recoveries in 2H would also be healthy, potentially amounting to about Rs 20bn. Provisions were Rs 21.6bn, up by 11% QoQ and 32.8% YoY, translating to annualised credit cost of 92 bps. However, excluding discretionary excess provisions, underlying credit cost for the quarter amounted to 52 bps.

The overall impact of the RBI ban on BoB World is quite minimal on the bank: Less than 3% of accounts openings were happening via BoB World. It is business as usual for deposits growth since there are other channels that are working strongly.

We maintain ‘Buy’ on BoB with a revised price target of Rs 290: We value the bank at 1.1x FY25 P/BV for an FY24E/25E/26E RoE profile of 15.1/16.0/16.1%. We assign a value of Rs 18 per share to the subsidiaries, based on SOTP.

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