Buy Bank of Baroda Ltd For Target Rs.110 - Emkay Global
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Tax impact leads to a loss; impressive asset quality, retail growth trend
* Despite a higher recovery in written-off accounts and contained provisions, BOB posted a loss of Rs10.5bn (est.: PAT of Rs4.5bn) mainly due to DTA reversal as it moved to a new lower tax structure. Impressive asset quality performance with GNPA ratio down at 8.9% (vs. 9.6% pro forma in Q3) due to lower slippages and lower RSA pool at 1.6%.
* Retail growth trend remains healthy at 14%, but corporate remains a drag. BOB expects reasonable pick-up in corporate growth during H2FY22, thereby supporting overall growth and margins. Cost saving with merger synergies kicking-in should support core RoA.
* Management expects overall slippages/LLP in FY22 to be lower vs. FY21 (2.7%/2%) due to lower stress in corporate pool, including overseas exposure. 60% of international fresh NPAs in FY21 will be restructured, leading to an upgrade. BOB may consider selling stake in its life insurance venture and also onboard a partner to ramp up the card subsidiary.
* With merger and asset quality pain largely behind, we expect BOB’s RoE to gradually improve to 10-12% over FY23-24E from a low of 1% in FY21. Retain Buy with a revised TP of Rs110 based on 0.8x FY23E ABV (vs. 0.6x), reflecting better growth/earnings and asset quality outlook.
Tepid growth as corporate growth remains sluggish; retail trending well:
Overall credit growth remained subdued at 2% yoy, dragged down by international/corporate portfolios. However, domestic organic retail/agriculture grew 14%/13% yoy respectively. Deposit growth too remained muted at 2.2%, in line with management’s strategy to manage LDR, while domestic CASA remained healthy at 43%, up 380bps yoy. Global NIM was down 5bps qoq, impacted by interest reversal on NPAs and interest waiver, partly offset by lower CoF (CoD down 14bps qoq) and overseas margin expansion. Going forward, the bank plans to focus on loan growth on the back of recovery in corporate capex, which should neutralize negative impact of the second Covid-19 wave on Retail/MSME, if any.
Asset quality under control; better recoveries in sight:
Reported GNPA ratio improved 76bps qoq to 8.9% vs. pro forma GNPA of 9.6% in Q3. Reported gross slippages were lower than expected for Q4 at Rs122bn, which adjusted for pro forma slippages in Q3 stood at Rs37bn. Overall restructuring book of 1.6% includes Covid restructuring of ~Rs94bn (1.3% of loans, Rs77bn corporate), of which Rs23bn (0.3% of loans) has been implemented. Overall SMA 1& 2 pool (>Rs50mn) stood at 3.9%, down from 4.4% in Q3, indicating easing of stress levels. In context of the above, management guides for lower slippages and lower credit cost for FY22 along with better recoveries (~Rs65bn) from NCLT/SARFAESI.
Outlook and valuations:
BOB has recently raised capital via QIP, leading to reasonable CET 1 at 10.9% now vs. 9% in Q3. With merger and asset quality pain largely behind, we expect BOB’s RoE to gradually improve to 10-12% over FY23-24E from a low of 1% in FY21. Retain Buy with a revised TP of Rs110 based on 0.8x FY23E ABV (vs. 0.6x). Key risks: Higher NPA formation, mainly in corporate/SME book; and slower-than-expected growth trajectory.
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