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NII growth recovers sharply; collection efficiency stable QoQ

Asset quality outlook improving; upgrade to BUY

* Bank of Baroda (BOB) reported a strong earnings performance, supported by a healthy core operating performance, despite sluggish business trends. Domestic NIM improved sharply by 39bp QoQ to 3.12%.

* Asset quality trends were stable sequentially in a challenging environment, with fresh slippage at INR51.3b (annualized slippage rate of 3.1%). However, higher write-offs and upgrades resulted in stable asset quality trends – the GNPA/NNPA ratio declined 1bp/6bp QoQ, while PCR was broadly stable at ~68%. Also, total SMA 1/2 (>INR50m) declined to ~2.68%, while the restructured book stood at 3.2% of loans. Collection efficiency (ex-Agri) was stable QoQ at 93%, better vis-à-vis many other peers.

* We increase our earnings estimates by 47%/22% for FY22/FY23E and estimate RoA/RoE of 0.7%/10.3% by FY23E. We upgrade our rating to BUY.

Strong NII drives earnings beat; asset quality steady

* BOB reported PAT of INR12.1b (significantly above our estimate), led by a healthy core operating performance, with NII growing 16% YoY (11% QoQ; 10% beat to MOSLE). Domestic NIMs improved sharply by 39bp QoQ to 3.12%.

* Other income grew ~63% YoY (~39% QoQ decline) to INR29.7b, affected sequentially by weak disbursements. Thus, core fee income declined ~33% QoQ (up 22% YoY). Thus, total operating revenues grew ~26% YoY (in-line). Opex grew 12% YoY to INR51.5b on account of a 21% increase in employeerelated expenses. Thus, the C/I ratio stood stable QoQ at 47.5%. PPOP grew ~41% YoY to INR57.1b (28% beat).

* On the business front, the COVID wave 2.0 significantly hampered economic activity. As a result, advances declined ~5% QoQ (~3% YoY decline). Among the segments, Retail growth came in at 11.8% YoY (flat QoQ), while the Corporate book plunged ~12% YoY (~11% QoQ decline). The MSME portfolio also declined 5% QoQ. Within Retail, Home/Auto grew 8%/25% YoY. Deposit growth was flat YoY (down ~4% QoQ). CASA growth came in at 12.8% YoY, and the domestic CASA ratio thus improved to 43.2% (v/s 42.9% in FY21).

* On the asset quality front, fresh slippage came in at INR51.3b (annualized slippage rate of 3.1%). However, higher write-offs and upgrades resulted in stable asset quality – the GNPA ratio was stable QoQ at 8.86%, while NNPA declined 6bp QoQ to 3.03%. PCR was broadly stable at ~68%. Slippages were primarily on account of the MSME, Retail, and Agri segments as corporate slippage was down sharply. Furthermore, total SMA 1/2 (>INR50m) exposure declined to 2.68% (v/s 3.23% in FY21). Also, the total restructured book stood at INR215.8b (3.2% of loans) v/s ~1.3% in FY21. Collection efficiency (ex-Agri) came in stable QoQ at 93%.

Highlights from the management commentary

* Restructuring 1.0: Retail (INR10.25b) and Corporate (INR100.25b) of which ~INR30b is non-fund. Bank carries provision of INR12.57b (15% on fund based).

* Restructuring 2.0: Retail (INR38b) and SME (INR5.62b). Bank carries provision of INR6.3b.

* Restructuring for MSME stands at ~INR95b.

* The bank endeavors to keep the slippages for FY22 below 2%. Overall, the bank expects total recoveries of ~INR140b in FY22.

Valuation and view

BOB reported a healthy earnings performance, supported by strong NII and sharp improvement in domestic NIMs. The margin expansion was supported by an improving asset mix, as retail growth held strong, while corporate loans declined 11% QoQ. The bank expects growth to pick up, led by retail segments, while corporate growth would see gradual recovery as the economic situation normalizes.

The bank reported stable asset quality in a challenging quarter, with stable CE at 93%. Furthermore, SMA 1/2 declined to ~2.7% of loans. We increase our earnings estimates by 47%/22% for FY22/FY23E and estimate RoA/RoE of 0.7%/10.3% by FY23E. Therefore, we upgrade our rating to BUY, with revised TP of INR100 (0.7x FY23E ABV).

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