Buy Bank of Baroda Ltd For Target Rs. 100 - Yes Securities
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Result Highlights
* Asset quality: Annualized slippage ratio for 1QFY22 was elevated in the absolute sense at 2.8% but controlled in the context of the rest of the banking industry
* Margin picture: Global NIM at 3.04% was up 32 bps QoQ, due to shedding of low yield corporate assets, among other reasons
* Asset growth: Advances de-grew -6.3%/-2.3% QoQ/YoY, dragged by corporate loans and MSME loans
* Opex control: Total opex de-grew/grew -9.4%/19.5% QoQ/YoY as other expenses de-grew/grew -18.1%/1.1% QoQ/YoY
* Fee income: Fees income declined/rose -33.5%/22.2% QoQ/YoY due to weakness in business activity on sequential basis
Our view – Slippage ratio broadly similar to SBI’s is a positive in the grander scheme of things
Corporate slippages contributed a mere 7.1% to the total fresh slippages of Rs 51.29bn underlining a truly benign corporate NPL cycle:
MSME and retail were key contributors to fresh slippages at Rs 21.8bn and Rs 12.45bn, respectively. Upgrades were healthy at Rs 34.08bn whereas recoveries amounted to Rs 10.27bn. The full year target for recoveries was Rs 140bn. Exposure under restructuring amounted to about Rs 240bn, which included about Rs 30bn of non-fund exposure. Provisions rose 14.7% QoQ to Rs 41.12bn and contained provisions worth Rs 3.73bn on account of RBI’s Circular dated 7 th June 2019. Provisions on restructured book have been made to provide 15% cover.
Management alluded to NIM expansion due to liability re-pricing lagging an up-move in interest rates, which would enhance yield instantaneously:
Importantly, shedding of low-yield corporate assets did not affect capital efficiency as these assets had a relatively high risk weight. Domestic yield on advances expanded 43 bps QoQ to 7.72%, where lower interest reversals had a role to play but management clarified that this was not the only factor driving yield. Domestic cost of deposits declined -18 bps QoQ to 3.92%. CD ratio declining -127 bps QoQ prevented an even larger NIM expansion.
Management stated that the process of shedding low-yield corporate assets was largely over, paving the way for more sustainable growth:
Corporate loans declined - 11.6% QoQ and MSME loans declined -9.3% QoQ. Retail loans were flattish, declining just -0.4% QoQ. We maintain ‘Buy’ rating on BOB with a revised price target of Rs 100: We value the standalone bank at 0.5x FY23 P/BV for an FY22E/23E/24E RoE profile of 9.2/10.6/12.5%. We assign a value of Rs 8.9 per share to the subsidiaries, on SOTP.
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