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Business growth healthy; higher provisions drag earnings

Asset quality improves further

* Bank of Baroda (BoB) reported a steady operating performance, but higher provisions affected its earnings adversely (20% miss) as the bank further strengthened its balance sheet. Business growth was strong with loans growing 6% QoQ.

* Asset quality improved even as fresh slippages rose to INR45.1b (Retail exposure of INR17b) with PCR increasing sharply to ~75%. Total SMA 1/2 (>INR50m) declined to 44bp of loans. Collection efficiency (ex-Agri) improved to 97% in Mar’22.

* We cut our FY23E earnings by 16% to factor in lower other income (due to rising bond yields). We estimate FY24 RoA/RoE at 0.9%/13.1% as we build in credit cost of 1.4%. Maintain BUY with a TP of INR135.

Margin contracts 5bp QoQ; PCR improves to ~75%

* BoB reported a PAT of INR17.8b (20% below our estimate), adversely impacted by higher provisions as the bank further strengthened its balance sheet. NII grew 21.2% YoY (flat QoQ; in line) as margin contracted 5bp QoQ to 3.08%. Over FY22, NII/PPoP grew 13%/9%, respectively, while PAT was at INR72.7b v/s INR8.3b in FY21.

* Other income declined 48% YoY to INR25.2b adversely impacted by treasury losses of INR6.8b. Core fee income, however, grew 17% QoQ. PPoP declined 10% YoY to INR56.4b (in line), while core PPoP rose 13% YoY.

* The bank availed the option to defer the increased family pension cost of INR14.5b over a five-year period and provided INR2.9b over FY22.

* Advances grew strongly at 6.1% QoQ (+10% YoY). Among segments, Retail loans grew 8.9% QoQ (16.8% YoY), while the Corporate book rose 3.5% QoQ. SME/Agri book increased 5%/4% QoQ. Deposits grew 8.2% YoY (+7% QoQ). Domestic CASA ratio stood broadly stable at 44.2%.

* On the asset quality front, fresh slippages increased to INR45.1b (~2.6% annualized) led by one Retail account of INR17b. However, healthy recoveries and write-offs resulted in 64bp/53bp QoQ improvement in GNPA/NNPA ratios to 6.6%/1.7%, respectively. PCR improved ~470bp QoQ to ~75%. Further, total SMA 1/2 (>INR50m) book declined to 0.44% while CE (ex-Agri) stood at 97% in Mar’22.

Highlights from the management commentary

 * Loan mix: EBLR-linked book stood at ~25%, T-Bill/other G-sec benchmarked book stood at 10% while MCLR book was at 50%.

* The bank is adequately positioned at current yields. The MTM depreciation impact due to a further rise of 50bp is likely to be lower than FY22.

* Loan growth is forecasted to be ~10-12% for FY23, while credit cost is likely to be ~1.5% for FY23.

Valuation and view

BOB reported a steady operating performance while higher provisions impacted net earnings adversely. Business growth was strong at 6% QoQ led by healthy trends across segments while margin witnessed a slight decline. CASA mix was broadly stable, which should shield the rise in deposit cost as interest rates harden. Asset quality improved even as slippages were elevated, with CE being strong at 97%. We cut our FY23E earnings by 16% to factor in lower other income (due to rising bond yields). We estimate FY24 RoA/ RoE at 0.9%/13.1% and value the stock at INR135 (premised on 0.7x FY24E ABV). Maintain BUY.

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