The total stressed assets increased from 10.8% to 11.7% sequentially. The outstanding balance of SMA-2 accounts still remains high at Rs 93 billion, 2.5% of net advances, vs Rs 80 billion, 2.1% of net advances, q-o-q. The additions to NPA were Rs 52 billion vs Rs 40.8 billion q-o-q and an average quarterly run-rate of Rs 42.9 billion in FY17. The provision coverage ratio was flat.

NII was up 1% y-o-y and was below our estimates on the back of lower than estimated NIM, 2.12% vs. 2.23% y-o-y, which seemed to have been impacted by interest reversal from higher than estimated slippages, slippage ratio of 5.7% on 12-month prior loans vs our estimate of 3.6%. Domestic NIM was down 52 bps y-o-y to 2.48%. The NIM compression more than offset the higher than estimated loan growth, 4.1% y-o-y, to result in a 3.8% lower than estimated NII. Core fee income grew 16.4% y-o-y, ahead of our expectation.

The muted income growth led to the cost to income ratio rising to 46.6% for the quarter vs 45.7% q-o-q and 44.6% y-o-y. The core pre-provision operating profit, excluding treasury income, was down 0.8% y-o-y, and 5% below our estimate.

Credit cost continued to remain elevated, 249 bps of average advances vs our estimate of 132 bps, 215 bps y-o-y and 286 bps q-o-q, leading to a net profit of Rs 2 billion, down 52% y-o-y, 77% below our estimate. We have taken down our EPS estimates, accounting for lower NIM and loan growth in FY18-20 and higher credit costs in FY18. We have increased our fee income growth forecasts for the period. We expect RoE to improve to close to 14% only by FY20. We forecast FY17-20E EPS CAGR of 71% on a muted base.

BOB trades at 1.3x book, June 2017 & 12.3x earnings , 12m to June’18 vs 10-year averages of 1.5x & 6.8x, respectively. PT of Rs 155 is based on 1.2x P/B June ‘18 and 6.7x P/E, 12 m to June 2019. Downside risks: Asset quality deterioration, NIM compression, and growth slowdown. Upside risks: PPOP trajectory improvement.