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Higher slippages overshadow earnings beat

Bank of Baroda (BOB) reported a beat on PAT which stood at INR 42.5bn (+28.4% YoY, +4.5% QoQ, +4.8% vs JMFe) primarily led by healthy loan growth (+19.3% YoY, +3.6% QoQ) and higher other income aided by fee income. While credit costs remained low at 84bps (vs 83bps QoQ), slippages increased to INR 47.5bn with gross slippage ratio at 2.09% (+82 bps QoQ) and net slippages at 1.12% (+74bps QoQ). This was attributed to slippages in two large accounts; one in aviation amounting (outstanding INR 17.73bn) and another in real estate. While slippages remained high and are to be closely monitored in the coming quarters, mgmt. expects recoveries to see a continued momentum. Mgmt. anticipates recoveries of ~ INR 20bn expected in 2H24. GNPLs/NNPLs improved to 3.32%/0.76% (- 20bps/-2bps QoQ) with PCR at 77.6% (+88bps QoQ). Loan growth was healthy (+19.3% YoY, 3.6% QoQ) largely driven by retail and international book (+5.2% and +6.4% QoQ). Mgmt. expects loan growth at 14-16% in FY24 within which retail loan is expected to grow around 20-22%. Deposits growth outpaced loans at +14.6% YoY/+4.1% QoQ driven by TD growth at 5.8% QoQ. Mgmt. highlighted about various initiatives on CASA front to support increase in low deposits in coming quarters. BOB has also worked on increasing fee income contribution by focussing on engagement with large and mid-corporates by adding RM’s which has garnered fruits this quarter. Margins declined 20bps to 3.07% on account of increase in COB (+24bps). Mgmt. remains confident on NIMs to remain stable between 3.10- 3.2% for FY24 even though rising COB puts pressure on NIMs in coming quarters. While, higher slippages were a dampener on earnings in 2Q24 we do not expect meaningful deterioration in asset quality in coming quarters. We build loan growth of 15% over FY24- 25E and avg. RoA/ RoE of 1.0%/15.9% over FY24-25E. BOB currently trades at 0.9x BVPS and we maintain BUY with a TP of INR 235, valuing BOB at 1.0x FY25 BVPS.

* Healthy loan growth; margins decline 20bps QoQ: BOB reported a healthy loan growth of +3.6% QoQ, +19.3% YoY aided by robust growth in retail and international book (+5.2% and +6.4% QoQ). Within retail loans, growth was led by higher growth in personal loans (+16.2% QoQ), non-agri gold (+14.6% QoQ), education loan (+7.8% QoQ) and auto loan growth (+6.5% QoQ). Mgmt. expects retail to drive credit growth with some moderation expected in personal loans. Mgmt. maintains its estimates for loan growth at 14-16% led by retail loans with it expected to grow at 20-22%. Mgmt. remains confident of BoB’s overall loan growth to be 1-2% higher than industry; we build loan growth of 15% over FY24-25E. Deposits growth outpaced loans at +14.6% YoY/+4.1% QoQ with domestic CASA at 39.9% (-45bps QoQ). Operating profit stood at INR 80.1bn (+2.5% YoY, +33% QoQ, +5.4% JMFe) driven by healthy loan growth, NIMs at 3.07% (-20bps QoQ), robust other income and higher opex at INR 69.8bn (+7.5% QoQ).

* Elevated slippages due to two large accounts: Slippages increased to INR 47.5bn with gross slippage ratio at 2.09% (+82 bps QoQ) and net slippages at 1.12% (+74bps QoQ). This was attributed to slippages in two large accounts; one in aviation amounting (outstanding INR 17.73bn) and another in real estate. BOB executed an ARC sale  amounting to INR 1.59bn (against an outstanding book of INR 4.15bn). Despite credit cost were lower at 84bps (vs 83bps QoQ). Additionally BOB also made additional provisions of INR 8.12bn against stressed standard. Mgmt. anticipates continued momentum in recoveries of ~INR 20bn expected in 2H24. GNPLs/NNPLs improved to 3.32%/0.76% (-20bps/-2bps QoQ) with PCR at 77.6% (+88bps QoQ). We build in avg. credit costs of 1% over FY24-25E.

* Valuation and view: We maintain our earnings estimate driven by continued loan growth momentum, healthy operational performance and low credit costs. While, higher slippages were a dampener on earnings in 2Q24 we do not expect meaningful deterioration in asset quality in coming quarters. We build loan growth of 15% over FY24-25E and avg. RoA/RoE of 1.0%/15.9% over FY24-25E. BOB currently trades at 0.9x BVPS and we maintain BUY with a TP of INR 235, valuing BOB at 1.0x FY25 BVPS.

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