Changes in functioning are reflected in numbers; core PPOP estimates up 2-4%; valuations are reasonable.
BOB’s 1QFY19 was in line on asset quality with Rs 47 bn of slippages but PPOP performance was strong with domestic growth of +20% y-y and in-line core NII/PPOP. We see two key positives in the recent trends for BOB: (1) peaking of credit cycle with SMA 1&2 book at 1.0-1.5% of loans each; (2) payoff from efforts to revamp retail asset origination leading to +40% y-y growth in retail loans and better profitability. We increase our core PPOP estimates by 2-4% and now expect ROEs of 13/14% in FY20F/FY21F. We maintain our TP of Rs 190 (~38% upside), which implies 1.0x adjusted Sep-20F book. Current multiple of 0.73x Sep-20F book looks reasonable and continuity of CEO should aid multiples materially. Subsidiaries add +10% to the PPOP but we do not value them for now and that could provide additional upside.
Asset quality in line but clearly peaking
BOB had slippages of Rs 47 bn. Fresh slippages were lower at Rs 29 bn and the additional slippages were due to rupee depreciation and non-fund devolvement. While lower slippages were due to slower recognition of the stress book reduction of Rs 18 bn, 85% of the slippages were from the known stress book, while slippages outside of stress book were negligible which is positive. Recoveries of
Rs 26 bn were higher during the quarter, led by NCLT-related resolution which led to no net slippages during the quarter. The watchlist was lower by Rs 15 bn to
Rs 86 bn now (2.0% of loans) and risky non-fund exposure is Rs 28 bn (0.7% of loans). Asset quality risks are peaking, with SMA 1&A book each down to 1.0-1.5% of loans v/s 3-4% of loans last year.
Operational performance very strong
Core PPOP was better than expected by Rs 2 bn mainly due to interest income from NCLT cases which could recur but not in similar proportion. The key positive from 1QFY19 for BOB was the continued pickup in retail originations leading to +40% growth in retail book. Management commented that with their additional distribution focus, better analytics and faster processing they should be able to hold on to current growth trends.
CEO staying or leaving
The changes brought in by top management are reflected now in the numbers; hence continuity should lead to multiple rerating. While the final call rests with the government, the CEO commented that he is unlikely to take up any new banking assignments, if he does not continue at BOB, ending speculation of his becoming CEO at Axis Bank.