Unusual quarter BOB : HDFC Securities

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Unusual quarter BOB reported a weak set of numbers led by a sharp deterioration in asset quality. G/NNPA spiked 18/24% QoQ driven by the highest ever quarterly slippages of Rs 30bn (3.1% ann.) & restructuring of Rs 16bn. In addition, management commentary for 4Q was very weak as well. Higher stressed additions pulled down NIMs to a 27-quarter low. Further, a one-time tax liability of Rs 3.7bn dragged the PAT down to Rs 3.3bn. On the positive front, fee income trend remained strong with stable CASA share and a gradual improvement in loan mix. Factoring weak 3Q nos, we cut our PAT estimate by 7/5% for FY16/17E. Muted 3Q show doesn’t change our long term thesis around BOB and it remains our preferred bet amongst PSBs. We like BOB for its high tier I capital, well balanced loan mix and better cushioned staff related provisions. Though, at current valuations (1.05x FY17E ABV), an immediate upside is capped. Nonetheless, we retain our positive stance as RoA/RoE stands to improve to 0.7/14% over the medium term. Maintain BUY with a revised TP of Rs 218/sh (1.2x FY17E ABV).  Asset quality surprised negatively with gross stressed additions of Rs 46bn (4.8% ann.). Combination of poor upgrades/recoveries of Rs 3.2bn and high slippages of Rs 30bn led to GNPA (3.9%) increasing by 18% QoQ. Disappointment came in from the 300bps QoQ decline in PCR to 62%, despite a 97% jump in LLP. BOB restructured assets of Rs 16bn; o/s domestic std. restructured pool now stands at Rs 205bn, 7.8% of domestic loans. We believe BOB asset quality pain is now at the crest of the cycle and expect slippages ratio to fall to avg. 1.5% over FY16-17E supported by macro tailwinds & a balanced loan mix.  Higher stressed assets created havoc within PL with both core and net earnings coming under pressure. NIMs stoop at multi-quarter low of 2.2%. Further, credit cost (1.2% ann.) was at a six-quarter high leading to 29% fall in PBT.  Efficient capital utilization and balanced growth held BOB in good stead vis-à-vis peers with low impaired ratio of 21%. While other PSBs are facing high risk of dilution, BOB is well placed. We estimate a tier-I capital requirement of Rs ~130bn (30% MCap) over FY16-19E.

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http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3011077