Buy Bank of Baroda Ltd For Target Rs. 250 By JM Financial Services
Weak quarter
Bank of Baroda (BOB) reported a weak quarter, though PAT came in ahead of estimates (+3% YoY, +4% QoQ, +17% JMFe) primarily led by non-interest income (+25% YoY, +38% QoQ). However, core performance was subdued, with NII declining (-7% YoY, -4% QoQ) as margins compressed sharply by -17bps QoQ. On business front, loan growth remained healthy (+13% YoY) while deposit growth was stable at (+11% YoY). Mgmt. guides for credit growth of 11-13% and deposit growth of 9-11% for FY26. Gross slippages/net slippages increased marginally to 1.1%/0.4% (+6/3bps QoQ) primarily led by MSME and agri sectors. Credit costs inched up to 0.53% (vs 0.38% QoQ). As liquidity conditions improve, bank's ability to protect margins while driving growth will be a crucial factor to monitor. While there is limited room for margin expansion and recoveries from previously written-off accounts have largely plateaued, current valuations at 0.7x FY27E BVPS remain attractive, offering favourable risk-reward despite the near term headwinds. We expect avg. RoA/ROE of ~1%/12.6% over FY26E/ 27E. Maintain BUY with a TP of INR 250 (valuing core bank at 0.7x FY27E BVPS).
* Soft quarter; margins decline: Despite a PAT beat (+3% YoY, +4% QoQ, +17% JMFe), underlying performance was subdued, with PPoP remaining flat YoY (+6% QoQ). Muted PPoP was largely due to, a) weak NII performance (-7% YoY, -3% QoQ), driven by a 17 bps QoQ contraction in margins (calc.), and b) higher operating expenses (+3% YoY, +8% QoQ). PAT outperformance was largely supported by strong non-interest income growth (+25% YoY, +38% QoQ), which helped partially cushion the impact of margin compression and rising costs. Return ratios remained steady, with RoA/ROE at 1.2%/ 15.1% (flat QoQ/+5 bps QoQ).
* Growth momentum picks up: Loan growth remained healthy at (+13% YoY, +5% QoQ), driven primarily by retail segment (+19% YoY). Within retail, growth was led by PL (+21% YoY), followed by auto loans (+20% YoY), LAP (+19% YoY) and home loans (+17% YoY). Agri and MSME segments both grew by 14% YoY, while corporate book registered a 9% YoY growth. Deposit growth remained stable at 11% YoY and 6% QoQ, broadly in line with system trends. CASA ratio stood at a healthy 40%. Mgmt. guides for credit growth of 11-13% and deposit growth of 9-11% for FY26. We build in a loan/deposit CAGR of 14%/12% over FY25-27E.
* Slippages largely steady; credit costs inch up: Gross slippages/net slippages saw slight increase to 1.1%/0.4% (+6bps QoQ, +3bps QoQ). Rise in slippages was primarily driven by MSME segment, where slippages rose to INR 14.7 bn (vs INR 9.6 bn QoQ), and agri book, which saw slippages increase to INR 6.7 bn (vs INR 5.1 bn QoQ). Meanwhile, credit costs inched up to 0.5% (vs 0.4% QoQ) with PCR declining slightly to 75% (vs 76% QoQ). We build in avg. credit costs of 0.71% over FY26/27E.
* Valuation and view: As liquidity conditions improve, bank's ability to protect margins while driving growth will be a crucial factor to monitor. While there is limited room for margin expansion and recoveries from previously written-off accounts have largely plateaued, current valuations at 0.7x FY27E BVPS remain attractive, offering favourable risk-reward value despite the near term headwinds. We expect avg. RoA/ROE of ~1%/12.6% over FY26E/ 27E. Maintain BUY with a TP of INR 250 (valuing core bank at 0.7x FY27E BVPS)
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SEBI Registration Number is INM000010361
