IGI Logo

Asset quality improving, but not fully out of the woods

One-time DTA reversal results in losses; restructured book at 1.3%

* Bank of Baroda (BOB) reported a loss in 4QFY21, impacted by one-time DTA reversals, even as a pick-up in fee income and recovery from W/O accounts aided operating profit. NII growth was weak, affected by high interest reversals and interest on interest waiver, thereby impacting margin. On the business front, overall loan growth was flat QoQ, while Retail/Agri witnessed strong traction.

* Collection efficiency improves to 93%, but remains lower v/s other peers. On the asset quality front, GNPA/NNPA ratio improved v/s pro forma GNPA/NNPA as of De’20. Total restructuring stood ~1.3% of advances (INR94b), while SMA-1/2 stood at 3.9% of loans. We remain watchful of the impact of the second COVID wave on asset quality and estimate credit cost to stay elevated at 2.1% for FY22E. Maintain Neutral.

Pick up in fee income and recovery from W/O accounts supports PPOP

* BOB reported a loss of INR10.5b in 4QFY21 (MOFSLe: PAT of INR9.25b), impacted by a one-time DTA reversal of INR38.4b as it chose to opt for a lower tax regime. NII/PPOP grew 5% each and PAT was up 52% YoY at INR8.29b in FY21.

* NII grew ~5% YoY (-5% QoQ) to INR71.1b (10% miss), impacted by interest reversal of INR3.7b and interest-on-interest tax refund of INR5b. Domestic NIMs moderated 23bp QoQ to 2.73% (global NIMs moderated 5bp QoQ to 2.72%). Other income grew 71% YoY to INR48.5b, led by an uptick in fee income (+38% QoQ) and recovery of INR20b from written off accounts in 4QFY21. Thus, total income grew ~24% YoY.

* Opex grew 21% YoY to INR56.9b, led by a 45% rise in employee-related expenses. The C/I ratio stood at 47.6% (v/s 51.1%/48.9% in 3QFY21/4QFY20). PPOP grew ~27% YoY to INR62.7b (11% beat).

* Advances grew 2.3% YoY (flat QoQ) to ~INR7.1t, with domestic advances up 4.9% YoY (flat QoQ), led by 14.4%/13.2% YoY growth in Retail/Agri. Within Retail, Home/Auto loans grew 11.1%/27.5% YoY. MSME loans rose 10% YoY.

* Deposits rose 2.2% YoY (flat QoQ), led by 17% YoY growth in domestic CASA. The domestic CASA ratio improved to 42.9% (v/s 41.2% in 3QFY21).

* The GNPA/NNPA ratio improved to ~8.9%/3.1% v/s pro forma GNPA/NNPA ratio of 9.6%/3.4% in Dec'20. PCR stood at 67.3% (81.8%, including TWO). Slippage in 4QFY21 came in at INR30.2b, while slippages moderated to 2.71% (v/s 2.97% in FY20). The restructured book was controlled ~1.3% of loans (INR94.3b), while SMA-1/2 stood at 3.9% of loans. Collection efficiency touched ~93% v/s 92% in 3QFY21.

Highlights from the management commentary

* Slippages of 50-60% from the International book should get restructured during FY22/FY23.

* It had targeted credit cost of 1.5-2% in FY21. The management would target to keep credit cost for FY22 lower than this range. Slippage ratio to be lower than FY21 levels.

* BOB could see some higher slippages from the Retail/MSME book, while slippages from the International book should moderate meaningfully over FY22.

* We expect incremental restructuring in FY22 to be lower than FY21.

* Restructuring: Corporate (INR77b), MSME (INR5.5b), and Retail (INR12b).

Valuation and view

BOB reported a pick-up in operating profit, led by traction in fee income and recovery from W/O accounts, even as a one-time DTA reversal resulted in losses. Business growth remains subdued, while Retail/Agri continues to witness healthy traction. On the asset quality front, GNPA/NNPA ratio improved from pro forma GNPA/NNPA ratio as of Dec’20, while International/Corporate book continues to witness higher slippages.

Total restructuring stood at 1.3% of loans, with two-third coming from the Corporate portfolio. SMA 1/2 stood ~3.9% of loans, which, coupled with the high unrated/BB & Below pool, keeps us watchful on asset quality. The impact of the second COVID wave could keep credit cost/slippage elevated. We estimate credit cost to stay elevated at 2.1% in FY22E. We maintain our Neutral stance with a revised TP of INR85/share (0.7x FY23E ABV).

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer