Buy Bank of Baroda Ltd For Target Rs.146 - Sushil Finance
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Asset quality to be better
Asset quality for Bank of Baroda (BOB) has improved with Gross non performing asset and Net non performing asset declining from 12.3% and 5.5% in FY18 to 7.3% and 2.3% respectively in Q3FY22 on account of resolutions in large corporate accounts. Special mention account 1 and Special mention account 2 as percent of standard advances (Accounts with outstanding above Rs.5 cr) stands at 1.1% in the current quarter as compared to 3.8% in Dec-20. Slippages as percent of advances have dropped from 2.8% in FY21 to 1.7% as on Q3FY22 and management expects slippages to be lower and recoveries in MSME and retail, resulting in lower credit cost going forward.
Loan growth to be steady
Loan growth has been around system loan growth (5-6%) with retail growth at healthy pace at double digits. Corporate loan growth has been muted mainly on account of lower interest rate in the system, thereby leading to competition in the corporate loans. With increasing interest rates in the system and reduction in competition, we expect loans for BOB to grow at ~9% in FY22-24E
Well capitalized to grow
The bank is well capitalized with the total capital adequacy ratio at 15.5% as on Q3FY22 as compared to regulatory requirement of 11.5%. This would enable BOB to grow in future without raising any capital and thereby avoiding any dilution.
Outlook and Valuation
We forecast Bank of Baroda’s revenue/PAT to grow at 9%/120% CAGR over FY21-24E. With the improvement in the operating environment and lower credit cost, we expect ROE to increase from 1.1% in FY21 to 8.2% by FY24E. Going forward, we expect the bank to deliver an adjusted book value of Rs.215 in FY24; assigning a target multiple of 0.7x, we arrive at a target price of Rs.146, showcasing an upside potential of 22% from current levels with an investment horizon of 18-24 mths.
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