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Bank of Baroda reported good results with operating growth ex treasury gains of 17% yoy, while lower provisions of Rs.1,685 cr (-58% yoy), resulting in a net profit of Rs.2,168 cr (79% yoy growth) for Q1FY23.

Key Highlights of Q1FY23 Results

• On the P&L front, NII grew by 12%/3% yoy/qoq, while Net interest margin (NIM) went down marginally by 6 bps on qoq basis to 3.02%. The bank expects ~10 bps improvement in the margins for FY23. Fees and commission income grew by 16% over the prior year, however hardening of interest rates resulted in a treasury loss of Rs.588 cr in the current quarter. Cost-to-income (C-I) ratio ex treasury for the quarter was at 51.8%. Lower operating profit was offset by lower provisions resulting in PAT growth of 79%/22% yoy/qoq.

• Loan book grew by 18%/3% yoy/qoq basis, with retail advances growing by 23% yoy, contributing 21% to the overall book. Home loan, which contributes ~57% of the retail book grew by 15.3%/3% yoy/ qoq, while personal loan grew by 147%/23.6% on yoy/qoq basis. In the personal loan segment, the salaried segment is ~72-75%, while average ticket size is Rs.2.5 lakh. International loan book grew by 30% yoy, with only 20% being contributed by short term trade finance. Margins on the international book were much better as compared to the domestic corporate segment. The bank has guided that the industry might grow about 10% to 12% in FY23 and it aspires to grow faster than the industry. Deposits witnessed 11% yoy growth, with CASA deposits growing at a similar rate. Low cost deposits increased by ~100bps yoy to 44.2% of the total deposits. Management expects that as the interest rate increases, deposit growth should witness a pick up.

• Gross NPA witnessed an improvement with GNPA ratio at 6.26% as compared to 6.61% on qoq basis. Slippages for the quarter were at Rs.4,352 cr with Rs.1,000 cr coming from the restructured book. Annualized slippage ratio was at 1.7% for the quarter compared to 2.5% in 4QFY22. Specific loan loss provision is healthy and stands at 75.9%. Management guided towards a range-bound credit cost of 125- 150bps led by controlled slippages and steady recoveries. The restructuring under the RBI resolution framework for COVID-19 as of June-end stands at Rs.19,666 cr, of which 15-16% of the book is stressed. SMA 1 & 2 has been at 0.48% v/s 0.44% in 4Q22. Collection efficiency stood at 98%.

OUTLOOK AND VALUATION

We forecast Bank of Baroda’s revenue/PAT to grow at 12%/90% CAGR over FY21- 24E. With the improvement in the operating environment and lower credit cost, we expect ROE to increase from 1.9% in FY21 to 8.9% by FY24E. Going forward, we expect the bank to deliver an adjusted book value of Rs.213 in FY24; assigning a target multiple of 0.7x, we arrive at a target price of Rs.145, showcasing an upside potential of 23% from current levels with an investment horizon of 18-24 mths.

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