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Solid core PPoP growth at 22% YoY; lower provisions underpin net earnings further

Asset quality improves sharply

* Bank of Baroda (BOB) reported a solid earnings performance led by a strong recovery in NII and lower provisions even as lower treasury gains impacted other income. Domestic NIM, thus, expanded 31bp QoQ to 3.2%. Advances registered strong 5.5% QoQ growth.

* BOB’s asset quality improved sharply as fresh slippage declined to INR28.3b (annualized slippage rate of 1.6%), which coupled with healthy recoveries and write-offs resulted in sharp 86bp/58bp QoQ improvement in GNPA/NNPA ratio, respectively. PCR thus increased ~350bp to ~71%. Total SMA 1/2 (>INR50m) declined 75bp QoQ to 1.12%. Collection efficiency (exAgri) was stable QoQ at 96% in Dec’21.

* We increase our FY22E-24E earnings by 11%-13% and estimate FY24E RoA/ RoE of 1%/14% even as we conservatively build credit cost of 1.3% (v/s 1.6% in FY22). Maintain BUY with a higher TP of INR150, implying 41% upside

NII growth revives sharply led by 28bp QoQ NIM expansion; asset quality robust

* BOB reported a PAT of INR22b (significantly above our estimate), led by a strong recovery in NII growth and lower provisions that declined 27% YoY to INR25.1b. Consolidated PAT surged 106% YoY to INR24.6b driven by a healthy performance across subsidiaries/JV.

* BOB’s NII grew 14.4% YoY (+13% QoQ; 9% beat) driven by a sharp increase in YoA, which improved 43bp QoQ to 7.8%. Domestic NIMs, thus, improved sharply by 31bp QoQ to 3.21% (28bp QoQ expansion in Global NIMs). Over 9MFY22, NII/PPoP grew 11%/16% while PAT was up 193% YoY to INR54.9b.

* Other income declined 13% YoY (-30% QoQ) to INR25.2b impacted by lower treasury income, which dipped 55% YoY/66% QoQ to INR4.2b. Core fee income, however, grew ~18% YoY (+6% QoQ). Opex grew at a modest 5% YoY to INR55.9b (in line). C/I ratio improved to 50.5%. PPoP grew 8% YoY to INR54.8b (4% beat), while core PPoP grew strongly at 22% YoY.

* The bank availed the option to defer the increased family pension cost of INR14.5b over a five-year period and provided INR2.18b over 9MFY22.

* Advances registered strong 5.5% QoQ growth (+4.8% YoY). Among segments, Retail loans grew 4.5% QoQ (11.1% YoY), while the Corporate book shot up 6% QoQ (flat YoY). SME/Agri book increased 4%/5% QoQ. Within Retail, Home/Auto grew 3.5%/6.8% QoQ. Deposit rose 2.5% YoY (+2% QoQ). CASA deposits grew strongly at 12.9% YoY; thus, domestic CASA ratio improved 82bp QoQ to 44.3%.

* On the asset quality front, fresh slippage declined to INR28.3b (annualized slippage rate of 1.6%). This, coupled with healthy recoveries and write-offs, resulted in a significant improvement in asset quality. GNPA/NNPA ratio declined notably by 86bp/58bp QoQ to 7.25%/2.25%. PCR improved ~350bp QoQ to ~71%. Further, total SMA 1/2 (>INR50m) book declined to 1.12% (v/s 1.87% in 2QFY22). CE (ex-Agri) stood at 96% in Dec’21.

Creditable all-round performance warrants a TP upgrade

BOB reported a commendable earnings performance led by a strong recovery in NII and lower provisions even as lower treasury gains impacted other income. Domestic NIMs expanded 31bp QoQ to 3.2% led by improvement in yields while cost of deposits continues to moderate. Business trends revived with advances growing strongly at 5.5% QoQ led by both corporate and retail books. CASA deposits too witnessed a strong traction and healthy CASA mix should shield rise in deposit cost as interest rates harden. The bank reported a sharp improvement in asset quality ratios, with CE strong at 96%. Moreover, SMA 1/2 declined to 1.12% of loans which provides comfort on incremental slippages. We raise our FY22E-24E earnings sharply by 11%-13% and estimate RoA/RoE of 1%/14% for FY24E. Maintain BUY with a higher TP of INR150 (based on 0.8x FY24E ABV), implying 41% potential upside.

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