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High other income boosts earnings; margins down 20bp QoQ Asset quality robust

* Bank of Baroda (BOB) reported a mixed quarter as PPoP grew 33% YoY (13% beat) aided by higher other income (49% beat) though margins declined 20bp QoQ to 3.07%.

* Business growth was healthy, with loan growth of 19% YoY (4% QoQ) and deposits growth of 15% YoY (4% QoQ). Loan growth was led by healthy growth in retail segments. CASA ratio moderated 45bp QoQ to 39.9%.

* Asset quality improved despite high slippages at INR47.5b (led by aviation account). GNPA/NNPA ratios yet improved to 3.32%/0.76%, while PCR moderated 88bp QoQ. SMA 1/2 was under control at 22bp of loans.

* Due to the restrictions imposed by RBI on BOB World, the bank was not able to provide certain services to new customers but multiple channels were available to them to do their transactions and therefore the impact was minimized. Deposits in all the segments and overall business remained healthy. The bank has taken significant actions in terms of compliance and expects the Ban to be lifted in the near term.

* We maintain our earnings estimates and expect FY25E RoA/RoE of 1.2%/16.8%. We reiterate our Buy rating on the stock.

Business growth healthy; PCR declines 88bp QoQ to ~77.6%

* 2Q PAT grew 28% YoY to INR42.5b (6% beat), led by high other income. NII grew 6% YoY to INR108b (3% miss) as margins declined 20bp QoQ to 3.07%.

* Other income grew 128% YoY to INR41.7b (49% beat), led by 32% YoY growth in fee income, healthy treasury profits of INR4.78b (vs. losses last year) and a robust recovery from TWO at INR12.3b (>100% YoY growth). Opex grew 17% YoY (up 8% QoQ, 3% beat). C/I ratio rose 118bp QoQ to 47% in 2QFY24.

* PPoP grew 33% YoY to INR80.2b (13% beat), while core PPoP grew 20% YoY. Provisions grew 33% YoY to INR21.6b (21% higher than MOSLe).

* Advances grew 4% QoQ (up 19% YoY). Among segments, Retail loans grew 5.2% QoQ (22% YoY), while Corporate book grew 1.4% QoQ. In retail, Personal loans grew 16% QoQ (up 67% YoY) and Gold loans grew 15% QoQ (up 65% YoY). Deposits increased by 15% YoY (4% QoQ). Domestic CASA ratio moderated 45bp QoQ to 39.9%.

* On the asset quality front, slippages rose to INR47.5b (~2.3% annualized). However, due to healthy recoveries, GNPA/NNPA ratios improved 18bp/2bp QoQ to 3.32%/0.76%. PCR moderated 88bp QoQ to ~77.6%. Total SMA 1/2 was under control at 22bp of loans.

* RoA stood at 1.14%, while reported RoE stood at 19.7%.

Highlights from the management commentary

* In the retail book, home loans grew 16% YoY, Auto loans grew 21% YoY, Personal loans grew 67% YoY and Gold loans grew 65% YoY.

* About 52% of the book is linked to MCLR and less than 30% of the book is yet to be re-priced. MCLR, if realigned, will lead to higher yields on advances.

* FY24 NIM is expected to be ~3.15%. Rising COD could dent margins.

* BOB has maintained its RoA guidance at >1% for FY24 and expects C/I ratio to be ~45% by end of FY24.

Valuation and view

BOB reported a mixed quarter characterized by robust fee income even as margins compressed further by 20bp QoQ to 3.07%. Business growth was healthy at 19% YoY, aided by strong traction across segments. The CASA mix saw a slight moderation. Fee income growth is a focus area and will help offset the persistent softness in NII growth. The bank reported a surge in recoveries from written-off accounts and has guided for continued traction in 2HFY24 as well. Asset quality continued to improve with NNPA at 0.76%, while lower SMA book provides further comfort on asset quality. We maintain our earnings estimates and expect FY25E RoA/RoE of 1.2%/16.8%. We value the stock at INR240 (1.1x FY25E ABV) and reiterate our BUY rating.

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