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All-round strong beat in 2Q; outlook also upbeat

* Bank of Baroda (BoB) reported a strong beat on PAT at Rs33.1bn (vs our est of Rs23.7bn), mainly led by robust growth, sharp 31bps QoQ jump in margins (including one-off interest recovery on upgradation of lumpy account and swap unwinding) to 3.3% and lower LLP, as NPA ratio declined 94bps QoQ due to higher recoveries/w-offs.

* Strong credit growth at 21% YoY/5% QoQ was supported by continued strong traction in the retail and overseas book. Bank expects domestic corporate growth to accelerate too, more so in the seasonally-strong Q4. This, coupled with continued asset re-pricing, should keep margins healthy.

* Bank guides for ~0.9% RoA in FY23 and ~1% in FY24 on the back of better growth/moderation in LLP, partly offset by increase in staff cost (Rs2.5bn per quarter) due to the impending new wage negotiations. The MD’s current term is likely to expire in Jan23, but could be extended by 6 months by the government.

* We have revised our earnings for FY23-25E by 18%-22% and the rollover TP to 0.8x Sep24E ABV, leading to revision in TP to Rs175/share (up from Rs140). We retain our BUY rating on the stock.

* What we liked: Strong credit growth (21% YoY) coupled with margin uptick (31bps QoQ) and improvement in headline NPA ratios (94bps QoQ). What we did not like: Rising share of the low-margin overseas book and moderation in CASA ratio.

* Strong credit growth, asset re-pricing and one-off interest recovery leads to sharp margin uptick: Overall credit growth was strong at 21% YoY/ 5% QoQ, led by robust traction in the retail and overseas book. Retail growth was, in turn, backed by strong growth in Housing, PL and Auto loans. But growth in agri, MSME was relatively moderate, while the domestic corporate book witnessed de-growth. However, NIMs improved by 31bps QoQ to 3.3% bolstered by strong growth, asset re-pricing, one-off interest recovery on upgradation of lumpy account and swap unwinding. Bank expects margins to remain healthy, as the full impact of asset re-pricing is yet to be seen.

* Elevated slippages, but sharp reduction in NPAs due to higher recoveries/w-offs: Fresh slippages were elevated at Rs44.7bn/2.6% of loans, but higher recoveries/upgrades and w-offs led to a sharp 94bps reduction in overall GNPA ratio to 5.3%. The restructured pool sharply moderated to Rs177bn/2.1% of loans vs 2.5% of loans in Q1. Given the improving repayments, the RSA pool should trend down further. Bank has increased its specific PCR during the quarter to a high of 79% and, thus, reduced its LLP guidance to 1%-1.25% with a positive bias. Bank is largely compliant with standard asset provisioning requirement on stressed public-sector enterprises and, in fact, had a marginal reversal during Q2.

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