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Healthy asset quality, positive outlook

Bank of Baroda (BoB) is a public-sector banking and financial services company in India. It has 8,205 branches in India and 93 offices in 17 foreign countries.

• Net interest income (NII) increased 24.4% YoY to Rs. 10,997cr in Q1FY24, led by strong growth in yield on advances, moderated by an increase in the cost of deposits.

• GNPA/NNPA ratios improved to 3.5%/0.8% (vs 3.8%/0.9% in Q4FY23).

• Strong growth in advances and deposits, continuous improvement in asset quality and the management’s sharp focus on reducing the operating expenses augur well for the bank’s future performance. Hence, we upgrade our rating on the stock to BUY, with a revised target price of Rs. 217 based on 0.87x FY25E BVPS.

PAT soars, aided by lower cost to income and higher other income

In Q1FY24, BoB’s interest income grew 40.2% YoY to Rs. 26,556cr, driven by robust growth in interest on advances (up 52.0% YoY) and income on investments (up 22.0% YoY). Interest expense rose 54.1% YoY to Rs. 15,559cr. Consequently, NII increased 24.4% YoY to Rs. 10,997cr. Cost-to-income ratio (CIR) improved to 45.4% (down 940bps YoY). Non-interest income surged 181.1% YoY to Rs. 3,322cr. Subsequently, adjusted profit after tax (PAT) jumped 87.7% YoY to Rs. 4,070cr, partially offset by a rise in provisions (up 20bps YoY) and higher taxes (up 710bps YoY).

Major improvement in asset quality

Gross advances grew 2.2% QoQ and 18.0% YoY to Rs. 990,988cr, mainly driven by robust growth across segments. Retail loans rose 3.4% QoQ and 24.8% YoY, led by strong growth in home, auto and personal loans. Corporate, agriculture and MSME loans grew 14.6%, 15.1% and 12.7% YoY, respectively. Deposits grew 16.2% YoY to Rs. 1,199,908cr (flat QoQ), while the CASA ratio shrank 190bps QoQ and 390bps YoY to 40.3%. The bank’s asset quality improved, with GNPA declining to Rs. 34,832cr (down 5.3% QoQ and 33.8% YoY). GNPA/NNPA ratios improved to 3.5%/0.8% (vs 3.8%/0.9% in Q4FY23). Provision coverage ratio stood at 93.2% vs 92.4% in Q4FY23. Capital adequacy ratio was 15.84%, and the tier-I ratio was 13.64%, well above the regulatory requirements.

Key concall highlights

• The management expects the advances growth to range 14-15% in FY24, with an underlying 12-13% growth in corporate loans, 18-20% in retail loans and ~15% in international books.

• The fee income growth was strong at ~18% YoY, a six-quarter high. The management sees ROA above 1% going forward. In case of any moderation in NIM, fee income growth is expected to compensate to a substantial scale for ROA.

Outlook & valuation

The bank delivered a superior performance in Q1FY24. We expect strong growth in advances, led by the retail and corporate segments. However, NIM could moderate in the near term owing to the rising cost of deposits. Major improvements in asset quality, sufficient capitalisation, and diversified loan portfolio should support the bank's future performance. We also expect a lower cost-to-income ratio to boost profitability in the coming quarters. Therefore, we upgrade our rating on the stock to BUY, with a revised target price of Rs. 217 based on 0.85x FY25E BVPS.

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