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NII misses estimate; downgrade to Neutral on limited earnings, growth levers

Asset quality remains healthy

* Bank of Baroda (BOB) reported 3QFY25 PAT at INR48.4b (10% beat), aided by lower-than-expected provisions. NIMs contracted sharply by 16bp QoQ to 2.94%, partly due to a one-off NII gain of INR3.5b in the prior quarter.

* NII declined 1.8% QoQ to INR114b (5% miss), while other income grew 34% YoY to INR37.7b (14% beat), aided by better fee and treasury income.

* Provisions came in lower at INR10.8b (45% lower than MOFSLe), down 54% QoQ. Business growth was steady at 12% YoY, with advances growth of 12% YoY/2.7% QoQ and deposit growth of 11.8% YoY/2.1% QoQ. As a result, the CD ratio increased to 82.7% (up 45bp QoQ).

* Slippages stood at 0.9%. GNPA declined 7bp QoQ to 2.43%, while NNPA inched down 1bp QoQ to 0.59%. PCR was broadly stable at 76%.

* We tweak our FY25/FY26 EPS estimates by +2.8%/-1.3% and expect FY26E RoA/RoE at 1.05%/15%. We remain watchful on business growth owing to a high CD ratio (82.7%) and increasing reliance on bulk deposits. We estimate margins to remain under check, as deposit competition is likely to remain elevated. We downgrade our rating to Neutral and revise our TP to INR250 (0.9x Sep’26E ABV).

Business growth steady; credit cost guidance maintained at 0.75%

* PAT grew 5.6% YoY (down 7.6% QoQ) to INR48.4b (10% beat), led by lowerthan-expected provisions. NII declined by 1.8% QoQ (5% miss). NIMs declined by a sharp 16bp QoQ to 2.94%. 9MFY25 PAT stood at INR145.3b (up 12.6% YoY), and we estimate 4QFY25 PAT at INR46.6b (down 4.6% YoY).

* Other income grew 34% YoY to INR37.7b (14% beat), aided by better core fee and treasury income. Opex grew 9% YoY/2.7% QoQ to INR75.2b (in line). As a result, PPoP grew INR76.6b (up 9.3% YoY).

* Provisions came in lower at INR10.8b (down 54% QoQ, 45% below MOFSLe). PCR was broadly stable at 76% as slippages were under control. BOB expects the annualized credit cost to remain below 0.75%.

* Advances grew at a healthy 12% YoY (up 2.7% QoQ). Among segments, retail book grew faster at 4.8% QoQ, while corporate book declined by 0.4% QoQ. In Retail, home loans rose 4% QoQ, auto loans grew 6.6% QoQ, and personal loans grew faster at 7.1% QoQ.

* Deposits grew 11.8% YoY/2.1% QoQ, led by faster growth in bulk deposits. Domestic CASA mix thus declined marginally to 39.7% (down 16bp QoQ).

* On the asset quality front, slippages moderated to 0.9%. However, recovery and accelerated w-offs led to a 7bp QoQ decline in the GNPA ratio to 2.4%, while the NNPA ratio declined 1bp QoQ to 0.6%. SMA 1/2 remained high at 49bp.

* RoA declined to 1.15% in 3Q, while RoE came in at 17%.

Highlights from the management commentary

* NIM guidance is 3.1% (+/- 5bp). There can be an upside bias in NIMs despite the expected rate cuts.

* PL book slippage was INR1b, while the normalized slippage run rate is INR25b, with the total PL book at INR340b. The bank is comfortable in maintaining 25% YoY growth in this segment.

* Domestic yields have declined, despite slower growth in the corporate segment.

* The bank focuses on enhancing the quality of its advances portfolio with strong underwriting standards. It is also maintaining a balance between income growth from advances and overall loan book expansion.

Valuation and view: Downgrade to Neutral with a TP of INR250

BOB reported a weak quarter, characterized by the NII miss, while the earnings beat was led by lower provisions. The bank has lowered its NIM guidance by 5bp amid pressure on yields, while the costs remain elevated. Business growth was slightly lower than our estimates, while yields remained under pressure despite the bank moving away from corporate loan and growing faster in personal loan. Slippages were under control and BOB expects the credit cost to remain at 0.75%. We tweak our FY25/FY26 EPS estimates by +2.8%/-1.3% and expect FY26E RoA/RoE at 1.05%/15%. We remain watchful on business growth owing to a high CD ratio (82.7%) and increasing reliance on bulk deposits. We estimate margins to remain under check, as deposit competition is likely to remain elevated. We downgrade our rating to Neutral and revise our TP to INR250 (0.9x Sep’26E ABV).

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