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Strong growth/Earnings beat; Valuations remain attractive

* Despite lower treasury income, Bank of Baroda (BoB) reported a strong beat in PAT at Rs21.6bn (estimate: Rs15bn) mainly led by lower loan loss provisions amid steady improvement in asset quality and healthy provision cover on the stock of NPAs. NIM contracted qoq to 3.02% mainly due to higher growth in low-margin overseas book.

* Credit growth was strong at 20% yoy/3% qoq, albeit on a lower base, mainly due to strong retail and overseas book growth. The bank expects overall credit growth to be in-line with the industry or slightly better than the industry, with accelerating retail growth. This along with re-pricing benefit should lead to margin expansion and support core-profit growth.

* Overall, GNPA ratio contracted 35bps qoq to 6.3% due to lower slippages, but restructured pool remains elevated at 2.5% of loans. However, the bank expects overall relapse rate to remain low at 20% (stressed pool at Rs30-40bn) of the restructured pool with repayments picking up.

* BoB remains well-capitalized among large PSBs, with CET-1 ratio >11% post QIP and, thus, does not pose any risk of dilution. We have revised our earnings estimates for FY24/25E by 1%/3% and rollover TP to 0.7x June’24E ABV, leading to revision in TP to Rs140 (up from Rs130). We retain our Buy rating on the stock.

improving retail/domestic growth and asset re-pricing should reflecting in margin expansion:I Overall credit growth improved to 20% yoy/3% qoq, albeit on a low base. Domestic credit growth was mainly led by retail (including mortgages, PL, and VF), while higher overseas credit growth was led by trade finance. However, overall NIM declined by 6bps qoq to 3.02% mainly due to higher growth in low-margin overseas book. The bank expects overall retail/domestic credit growth to accelerate, which coupled with re-pricing of assets should lead to 10bps improvement in margins.

NPAs continue to trend down, but restructured pool remains elevated: Fresh slippages moderated to Rs43bn/2.6% of loans, which was due to lower slippages from the corporate segment. However, restructured book remains elevated at 2.5%. As per management, incremental stress pool within the restructured book should be Rs30-40bn (20% of the restructured pool at the higher end), allaying concerns on the restructured book. The specific provision cover stands at healthy levels of 76% and, thus, incremental LLP should be contained

Outlook and valuation: We have revised our earnings estimates for FY24/25E by 1%/3%, factoring better growth trajectory, partly offset by higher opex and moderation in treasury gains. We rollover our TP to 0.7x June’24E ABV, leading to revision in TP to Rs140 (up from Rs130). We retain our Buy rating on the stock. Key risks: Higher NPA formation, mainly in the corporate/SME book, and slower-than-expected growth trajectory..

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