Unlike most corporate bank peers, we expect BOB’s NIMs to improve as MCLR-led drags will be offset by lower interest reversals and higher domestic loan mix.
Three key reasons for the upgrade to ‘buy’ from ‘neural’: early stress recognition and high NPA coverage of 58% imply a lower P&L hit in FY18F from higher provisions for RBI’s identified large NPAs; the PPOP outlook is better than peers as the capital levels will not constrain growth, and unlike peers there are positive NIM catalysts for BOB in FY18F – we expect +12% ROE in FY19F; with a 17% correction in the past two months, we believe the market expectations on NPA resolutions are more realistic with BOB trading at 0.85x Mar-19F adjusted book. Our unchanged TP of `200 is based on 1.1x Mar-19F adjusted book. We expect +10% loan growth for BOB over FY17-19F as the bank has already consolidated its loan book in the past two years and Tier-1 at ~10% is better than most peers. Unlike most corporate bank peers, we expect BOB’s NIMs to improve as MCLR-led drags will be offset by lower interest reversals and higher domestic loan mix. We thus expect a core PPOP CAGR of ~13% over FY17-19F. RBI’s recent directive to increase the provisioning for 12 large NPA cases led to uncertainty over near-term P&L provisioning, but BOB’s NPA coverage at 58% is the highest of the corporate banks and provides comfort, in our view.
Rating agency CRISIL recently indicated a 60% haircut for these 12 large accounts, which is similar to our 60% haircut assumption used to arrive at our adjusted book.M&A risks have increased, with the finance ministry indicating a potential merger of small PSU banks with larger ones. We believe BOB’s valuation at 1.0x FY17F book vs. 0.5-0.6x FY17F book for smaller PSUs factors in M&A-related provisioning risks. Our TP of `200 implies 1.1x Mar-19F adjusted BVPS of `181. M&A and slower NPA resolution are key downside risks.