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Steady quarter

Bank of Baroda (BOB) reported a steady quarter with PAT at INR 48.4bn (+5.6% YoY, -7.6% QoQ) led by a) steady NII (+2.8% YoY, -1.8% QoQ), b) moderation in opex growth (+2.7% QoQ, +9.1% YoY), and c) lower-than-expected credit costs at 0.38% (vs 0.86% QoQ). Slippages during the quarter moderated to INR 29.1bn (vs INR 31.1bn QoQ). On the growth front, both loans (+12.4% YoY, +2.7% QoQ) and deposit growth (+11.8% YoY, +2.1% QoQ) remained modest reflecting broader macroeconomic conditions. CoDs saw an uptick to 5.2% (+4bps QoQ), while yields declined to 8.87% (-6bps QoQ) in tandem. As a result, margins witnessed a sharp compression to 3.11% (-16bps QoQ). Mgmt. revised margin guidance for the year to 3-3.1%. Recoveries from TWO stood at INR 7.2bn which while was sequentially lower (Q2 saw a substantial recovery of INR 25.2bn), was in-line with mgmt.’s guidance of INR 7.5-8bn run-rate per quarter. Headline asset quality metrics remained steady with GNPA/NNPA at 2.43%/0.59% (-7bps QoQ, -1bps QoQ) and PCR at 76%. Amidst the prevailing tight liquidity conditions and elevated credit costs, the bank's ability to effectively manage slippages 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 compelling value despite the headwinds. We expect RoA/ROE of ~1%/13.8% by FY27E. Maintain BUY with a TP of INR 270 (valuing bank at 0.9x FY27E BVPS).

* Growth remains soft: Loan growth remained subdued at (+12.4% YoY, +2.7% QoQ) with retail segment growing (+19.5% YoY, +4.8% QoQ), agri book growing (+12.5% YoY, +4.5% QoQ), and MSME segment growing (+13.6% YoY, +3.9% QoQ). Corporate segment saw a sequential de-growth (-0.4% QoQ, +6.8% YoY). Within retail, growth was led by PL (+7.1% QoQ, +24% YoY), followed by auto loans (+21.1% YoY, +6.6% QoQ) and home loans (+16.6% YoY, +4% QoQ). While most peers are scaling back their exposure to unsecured loans, PLs constitute a relatively small portion of BOB's overall advances (~4%). As a result, mgmt. remains confident in sustaining growth of 25-30% in this segment, while continuing to uphold steady asset quality. In-line with broader challenges in deposit accretion, deposit growth also remained soft (+11.8% YoY, +2.1% QoQ), though CASA was stable at 33.2% (-40bps QoQ). We build in a CAGR for loans at 13% and deposits at 11% over FY24-27E.

* In-line operating performance; margins decline: Operating profit stood at INR 76.6bn (+9.3% YoY, -19.1% QoQ, -2.7% JMFe) led by a) steady NII (+2.8% YoY, -1.8% QoQ) and b) moderation in opex growth (+2.7% QoQ, +9.1% YoY). CODs inched up to 5.2% (+4bps QoQ), while yields saw a marginal decline to 8.87% (-6bps QoQ). As a result, margins saw a sharp contraction to 3.11% (-16bps QoQ). Mgmt. indicated that 5-6bps impact was due to the impact of penal charges. Further, mgmt. has revised NIM guidance for FY25 to 3-3.1%. Credit cost was a positive surprise as it moderated to 0.38% (vs 0.86% QoQ). Slippages also declined to INR 29bn (vs INR 31.1bn QoQ) with slippage ratio moderating to 1.07% (vs 1.17% QoQ). Headline asset quality metrics remained steady with GNPA/NNPA at 2.43%/0.59% (-7bps QoQ, -1bps QoQ) and PCR at 76%. We build in avg. credit costs of 0.7% over FY25E/27E.

* Valuation and view: Amidst the prevailing tight liquidity conditions and elevated credit costs, the bank's ability to effectively manage slippages 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 compelling value despite the headwinds. We expect RoA/ROE of ~1%/13.8% by FY27E. Maintain BUY with a TP of INR 270 (valuing bank at 0.9x FY27E BVPS).

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