Published on 19/09/2022 10:10:09 AM | Source: LKP Securities Ltd

Buy Bank of Baroda Ltd For Target Rs. 202 - LKP Securities

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Bank of Baroda (BOB)

has been delivering strong performance across parameters. The Asset Quality is witnessing continuous improvement and standard restructuring is at manageable level. Furthermore, the credit growth remains healthy and is expected to grow at a robust pace. Lower credit cost and steady margins may result in strong profitability in FY23E and is expected to beat the guidance. We believe, inexpensive valuation (P/ABVPS: 0.8x) makes BOB lucrative and we are rerating the stock with increased target price of ?202 (?146 earlier).

Investment Argument

Asset Quality to improve further on the back of lower slippages and steady recoveries BOB has witnessed normalization in delinquencies post moratorium and restructuring glitches. Management guided on contained slippages during current fiscal. Moreover, as per management, steady rate of recoveries from retail and SME book will continue. However, corporate recoveries are not expected. A manageable restructuring book (?96bn; 2.5% of book) and lower SMA pool (SMA 1/SMA 2 of 48bps and 44bps) cause no major threat to credit quality. Factoring lower slippage ratio of 1.6% in FY23E (v/s 3% in FY22), we expect the GNPA ratio to be at 6.4% and 5.9% in FY23E and FY24E respectively against 6.6% in FY22. The NNPA ratio is likely to be at 1.5% (with PCR of 76.4%) as on FY23E.

Advances are expected to grow at healthy pace with improvement in CDR The economy is witnessing healthy credit environment as the industry credit growth was 15% YoY (as per RBI latest publication). We believe, BOB shall grow at a similar pace with industry (considering a giant balance sheet) and register a credit growth of 12% in FY23E and 14% in FY24E. Nevertheless, management guided a credit growth of 12% – 13% for FY23. High margin products such as unsecured personal loans, home loans and vehicle loans to remain key focus area for the bank. The bank’s deposit is likely to grow at 11% for FY23E with improving CDR level of 74.9% v/s 74.3% in FY22. CASA ratio (44.2% in latest quarter) is at satisfactory level and we expect it to be in the same range. BOB has adequate capital cushion (CRAR: 15.5% and Tier 1 of 13%) for balance sheet growth and likely to witness no further equity dilution although, the bank may raise funds through AT-1 and Tier-2 bonds

Margins to stay stable with improving yields

The bank carries an equal proportion of fixed and floating rate loans. The floating rate loan share is likely to increase in next few quarters. A higher share of floating rate loans may translate into higher yields on advances. NIM trend for the bank is getting stronger with increase in lending rate outpacing deposit rate hikes and favourable loan mix shift towards higher-yield segments. We have estimated the YOA (calculated) of 6.7% for FY23E v/s 6.6% in FY22. However, the interest spread to stay at 2.7% and NIMs (calculated) to improve by 10bps to 2.9% for FY23E.

Credit Cost to moderate further in FY23E

BOB reported 1QFY23 credit costs at ~75bps, much below their normalized levels, led by lower delinquencies and strong recoveries (in retail). Even as we have seen strong rebound in retail growth, especially the unsecured book, the focus is still on higher-quality segments with the share of sub-prime borrowers in new originations near its pre-covid levels. Corporate asset quality remains robust, on improved corporate profitability and large corporate deleveraging. We estimate overall FY23E credit costs of 150bps and 140bps for FY24E.

Healthy margins and lower credit cost to improve profitability Considering 10bps improvement in NIMs, the net interest income is likely to grow at 12.6% YoY for FY23E v/s 12% credit growth. The C/I ratio is likely to improve with denominator effect of higher income; thus, translating in 10.5% YoY in PPOP growth for FY23E. A moderate credit cost (150bps) may result in 36% growth in reported profit. Hence, the ROA/ROE is likely to be at 0.7%/10.8%.

Outlook and Valuation

The bank is well equipped to overcome the next challenge of restructuring headwinds, akin to other banks. The guidance suggests credit cost of ~1.5% and slippage of ~1.6% in FY23E. We expect strong growth in earnings for FY23E driven by net-interest income and decline in credit cost, translating into ROA/ROE of 0.7%/10.8% respectively. We value BOB at 1.1xFY24E Adj. BVPS to arrive at a revised price target of ?202 (?146 earlier).


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