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Result and Price Analysis 

In 1QFY23, Bank of Baroda (BOB) has delivered an expected result on operating and assets quality front. The fresh slippages were lower at  32.6bn v/s  45bn in 4QFY22. Furthermore, the reduction (up-gradation & recovery) stood  58bn v/s  77bn in the previous quarter. Its reported GNPA (6.26% v/s 6.61% in 4QFY22) and NNPA (1.58% v/s 1.52% in 4QFY22) declined substantially along with stable PCR (incl. TWO) of 88%. The bank has witnessed healthy growth in net advances (19.6% YoY, 3% QoQ) and deposit growth (11% YoY, 1.3% QoQ) with better liquidity position (LCR of 140% +). Moreover the bank has reported net profit of  21.7bn on the back of lower provision ( 16.8bn v/s  37.4bn in the previous quarter). SMA1/2 pool flat sequentially at ~48bps. We expect the bank to post a ROA/ROE of 0.8%/11.5% by FY24E led by steady balance sheet growth along with higher PCR and improving asset quality. We value the standalone bank with PBV of 0.8xFY24E Adj. BVPS of  183 to reach a price target of  147 (revised from  128). We recommend BUY rating with potential upside of 26%.

Lower Slippages; Asset Quality improvement continues: The GNPA and NNPA ratio inched down to 6.26%/1.58% (v/s 6.61%/1.72% in 4QFY22) because of higher credit growth and lower fresh slippages. The PCR including technical write-off stood 89% of GNPLs. The absolute GNPA decreased by 2.7% sequentially. In 1QFY23, the fresh slippages were at higher level of  32.6bn v/s  45bn in the previous quarter. Corporate book contributed 17% of the slippages amount where retail contribution was at 18%. SME book has slippages contribution of 34%. The reduction (up-gradation, recovery & write-offs) stood  58bn v/s  77bn in the previous quarter. The bank expects better recovery from legacy Power accounts as the traction has improved. Aggregate NCLT exposure is  50bn, with coverage of 97.5%. The Bank’s SMA 1&2 book was flat sequentially at around 48bps. The Bank has made provisions of  16.8bn (Credit cost: 0.75% v/s 2.69% in 4QFY22). The bank has utilized  1.2bn of standard asset provisions made in prior quarters. The management guided credit cost of 150bps for FY23.

Healthy credit growth driven by retail loans: The bank’s net advances stood at ~ 8tn; grew by 19.6% YOY and 3% QOQ. Retail (17.6% contribution), Corporate (36% contribution) and Agriculture (13% contribution) grew by 5.1%, 0.7% and 0.1% QoQ respectively. Loan growth guidance for FY23 was 12% and more. The bank’s deposits stood at  10.3tn and grew by 11% YoY and de-grew by 1.3% sequentially; the bank’s CASA deposit de-grew by 2.1% QoQ and CASA ratio was stable sequentially at 44.2%. The bank’s CRAR was 15.46% vs. 15.98% in the previous quarter with CET 1 of 11.24%. The RWA to assets stood at ~53% with LCR well above the regulatory requirement. The bank raised Tier-1 capital in Feb-2022.

Lower provision offsets the PPOP de-growth: Domestic NIMs (3.07%) down by 7bps driven by lower domestic yields at 7.42%. Management believes NIMs to remain stable for FY23. Overall YOA and COD stood at 6.58% and 3.46% against 6.81% and 3.53% in the previous quarter. Overall NIMs inched up by 6bps to 3.02% which translated in NII ( 88.4bn) growth of 12% YoY and 2.6% sequentially. Of the total loan book, 10% linked to T-bill & G-sec, 50% MCLR. 26% EBLR coupled with higher share of CASA and significant portion of Investment book being in floating rate bonds. Hence, Management expects positive impact on margins in Short to Medium term. NIM would be watched as 26% of the loan book is EBLR linked. A stable NII growth and lower other income have translated in PPOP de-growth of 19.7% QoQ. However, PPOP de-growth was off-set by lower provision expenses ( 16.8bn v/s  37.4bn in 4QFY22). Thus, it resulted in 22% sequential growth in PAT of  21.7bn. The ROA/ROE improvement in line with 1QFY23, ROA/ROE of around 0.7%/10%.

Outlook & Valuation

We expect the bank to post a ROA/ROE of 0.8%/11.5% by FY24E led by steady balance sheet growth along with higher PCR and improving asset quality. We value the standalone bank with PBV of 0.8xFY24E Adj. BVPS of  183 to reach a price target of  147 (revised from  128). We recommend BUY rating with potential upside of 26%.

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