Buy Bank of Baroda Ltd For Target Rs. 275 By PL Capital
Quick Pointers:
* Weak quarter due to miss on NII/NIM; asset quality improves.
* Cut in NIM to drive earnings downgrade; deposit cost a key monitorable.
BOB saw a weak quarter with core PPoP miss of 7.3% as NII/NIM was 6.1% below PLe. Margins remain under pressure; while reported domestic NIM fell by 9bps QoQ, full year NIM for FY25 fell by 16bps YoY to 3.02% due to 24bps increase in deposit cost and 13bps fall in loan yields. In our view, the fall in yields was likely due to preference for growth over profitability while increase in funding cost was driven by reliance on higher cost bulk deposits in FY25. Bank expects NIM to remain under pressure in Q1FY26, post which it may improve. We trim NIM for FY26/27E by 7/3bps to owing to likely repo rate cuts which may result in earnings downgrade of avg. 7.0%. Loan/deposit growth guidance for FY26 was given at 11-13% and 9-11%. Stock is valued at 0.8/0.7x on FY26/27 ABV (20% discount to SBI). We tweak multiple to 0.9x from 1.0x and trim TP to Rs275 from Rs285 but we roll to Mar’27 ABV. Retain ‘BUY’.
* Weak quarter due to miss on NII/NIM leading to lower core PAT: NII was 6% lower to PLe at Rs110.2bn (PLe Rs117.4bn) as NIM (calc.) was lower at 2.71% (PLe 2.87%); reported NIMs declined by 8bps QoQ to 2.86%. Loan growth was 13.5% YoY (PLe 13.4%). Deposit accretion was in-line at 10.9% YoY. LDR decreased to 82.2% (82.7% in Q3’25). CASA ratio increased to 33.7% (33.2% in Q3’25). Other income was a beat at Rs52.1bn (PLe Rs34.3bn) due to higher treasury, TWO recovery and fees. Opex at Rs81bn was 1.6% above PLe led by higher staff cost & other opex. Core PPoP was 7.3% below PLe at Rs63.8bn. PPoP was Rs81.3bn. Asset quality improved as GNPA fell by 17bps QoQ to 2.26% (PLe 2.29%) driven by lower net slippages. Provisions were Rs15.5bn (PLe Rs16.2bn). Core PAT was 3.6% below PLe at Rs37bn. PAT was Rs50.5bn.
* NIM sees a QoQ blip again: Reported domestic NIM declined by 9bps QoQ to 2.94% due to (1) 13bps QoQ increase in deposit cost and (2) 11bps fall in loan yields attributable to faster growth in corporate/housing and T+1 based EBLR pricing. Bank expects NIM to remain under pressure in Q1FY26 post which it would normalize. NIM for H2FY26 would be much higher than H1FY26 since most of the bulk TD (20% share) would be repriced within 2-4 quarters. We trim NIM for FY26/27E by 7/3bps owing to likely repo rate cuts; bank would aspire to maintain full year NIM at FY25 levels (3.02%) which in our view may be tough in falling interest rate environment.
* Credit growth largely was broad based: Credit growth was 5.1% QoQ driven by domestic corporate (6.4%), retail (5.5%), SME (3.5%) and agri (4.8%). Within retail, growth was well-spread across home, auto, PL and education. For FY26, deposit growth was guided at 9-11% with loan growth of 11-13%. As per the bank, there is a possibility of upgrade in this guidance if surplus liquidity persists. On liabilities, bank intends to reduce dependance on bulk deposits which continue remain at 17% (vs FY24). A third of these deposits would be repriced lower in Q1FY26 by 30-40bps. Overall LDR was guided at 82-84%.
Above views are of the author and not of the website kindly read disclaimer
