Analysts suddenly gung ho on this PSU bank, see up to 50% upside

Analysts said the situation was still under control and the management commentary was strong.

They said a rebalancing of the portfolio in favour of retail and a gradual decline in the international book would support NIM for the PSU bank. This, along with a moderation in credit cost will improve the return on asset (RoA) trajectory for the bank, analysts said and suggested up to 50 per cent upside for the stock.

“BOB recently raised capital via QIP, leading to a reasonable CET 1 of 11.3 per cent. With the merger (Vijaya Bank and Dena Bank) and asset quality pain now largely over, we expect BoB’s return on equity (RoE) to gradually improve to 10-12 per cent over FY23-24 from a low of 1 per cent in FY21,” it said and suggested a price target of Rs 122.

At Monday’s close of Rs 81.15, that target suggested a 50 per cent upside.

Motilal Oswal Securities has hiked its earnings estimates by 47 per cent for FY22 and 22 per cent for FY23 post the bank’s Q1 numbers. Estimating an RoA of 0.7 per cent and an RoE of 10.3 per cent by FY23, it has upgraded the stock to ‘buy’, with a revised price target of Rs 100.

ICICIdirect also sees the stock at Rs 100. It listed four factors that would prove key to its performance. First is the shedding of the bank’s low yield exposure and its focus on retail segment. Secondly, a shift to the new tax regime, which is set to aid profitability. The third is the comfortable capital to risky asset ratio at 15.4 per cent, which may keep earnings dilution risk away. Lastly, the decent asset quality amid the tough situation would help.

The bank reported a net profit of Rs 1,209 crore compared with a loss of Rs 864 crore a year ago. Net interest income (NII) rose 16 per cent to Rs 7,892 crore. Net interest margin (NIM) came in at 3.04 per cent against 2.52 per cent YoY and 2.73 per cent QoQ.

Retail loans rose 12 per cent YoY, led by a 25 per cent growth in auto loans, 20 per cent growth in personal loans, and a 38 per cent growth in gold loans.

The loan book, however, declined 2 per cent due to a 10 per cent fall in corporate loans as the bank shed low-yielding loans.

The gross NPA ratio declined marginally to 8.86 per cent from 8.87 per cent in the March quarter and 9.39 per cent the year-ago period, as recovery and upgrades increased to Rs 4,435 crore from Rs 818 crore YoY. The bank management is targeting Rs 14,000 crore in recoveries in FY22 and has guided for 1.5-2 per cent credit cost and net slippages of less than 2 per cent.

“It was a relatively steady performance but uncertainty over subsequent Covid waves and relatively elevated stress pool still temper our enthusiasm on earnings stability. The bank’s recent capital raise was dilutive, which is a persistent challenge for PSBs. We are rolling overestimates to December FY22, revising our target to Rs 98 from Rs 95 earlier,” Edelweiss said.

Edelweiss said the demonstration of the merger value add and, indeed, getting through the current crisis without deep earnings erosion will be key to the stock performance.

The promised post-merger rationalisation benefits are not a foregone conclusion, given the complexity of the task at hand, it said and suggested that the valuation at 0.5 times FY22E P/BV lends some comfort.

JM Financial is building in a credit cost of 1.2 per cent and RoA of 0.7 per cent for FY23. It has a price target of Rs 95 on the stock.