NIMs contracted by 40bps q-o-q to <2% now partly led by interest reversals of Rs 2 bn but even adjusting for that NII was weaker than our expectations due to MCLR-led pricing pressure.
NIMs contracted by 40bps q-o-q to <2% now partly led by interest reversals of Rs 2 bn but even adjusting for that NII was weaker than our expectations due to MCLR-led pricing pressure. Loan growth remained muted with <1% y-o-y growth: This along with contraction in NIMs is impacting NII, which de-grew 9% y-y. Domestic loan growth moderated to <3% y-y vs +6% y-y growth reported in Q417 resulting in overall loan growth moderating to <1% y-o-y vs 3% in Q4FY17. Weaker NII was netted off by higher non-interest income and lower opex leading to PPOP being marginally better than our expectations but adjusting for on-offs in NII and opex, PPOP was largely in line with our muted expectation.
Core fee growth trend improved with 3% y-o-y growth, but this was largely due to a weak base and was still lower than our expectations. Beat on other income was led by higher FX gains. Opex de-grew by 25% y-o-y largely due to much lower employee costs, where bank had Rs 2.5 bn of one-off pension-related reversals. Lower employee expense was also due to a higher level of retirements.
Overall, core PPOP trends remained weakest within our covered PSUs at just 1.1% after adjusting for one-offs in both NII and opex. We think the weak core PPOP/assets will restrict ROE expansion going forward. Net slippages came in at Rs 13 bn, lower than our expectation of Rs 17 bn and Rs 24 bn run-rate in FY17. BOI has been conservative in recognising stress, and hence we think net slippage trends can continue to improve.
Gross slippages came in at Rs 40 bn (in-line with our expectations) but higher recovery and upgrades of Rs 27 bn and write-offs of Rs 23 bn led to marginal improvement in GNPLs q-o-q. Valuation and our view: While we are sanguine on asset quality for BOI and overall PSU banks, we expect core PPOP/asset for BOI to remain the weakest among our covered PSUs at 1% for FY18/19F, and we expect FY19F RoE of ~8.5%.
While the stock has run-up ~50% YTD, we think it deserves a discount to peers, as its RoE ramp-up will be the weakest and thus we reiterate our Reduce rating and prefer BOB (BOB IN, Buy) within PSUs. We value BOI at 0.65x FY19 adjusted book (currently trades at 0.8x FY19F adjusted book). Our Rs 135 target price implies ~15% potential downside.