Buy Bank of Baroda Ltd For Target Rs. 280 By Elara Capital Ltd
NIM miss; lower credit cost cushions PAT
Bank of Baroda’s (BOB IN) Q3 PAT at INR 48.4bn was broadly in line with estimates on lower credit cost, even as NII was a miss. Key highlights were: 1) NIM decline of 16bps QoQ, partially led by lower interest accrual from written-off pool versus last quarter, but was a miss, nonetheless. BOB lowered its NIM guidance but even that seems a stretch, 2) growth momentum was steady (loan growth of 12.4% YoY and deposit growth of 11.8%, YoY), with BOB maintaining FY25 guidance and c) asset quality outperformed with lower slippages feeding into much lower credit cost.
Discussions hereafter will focus on NIM trajectory, business growth and asset quality outcome (essentially on unsecured segments, even on a low base). BOB has sustained its ROA at 1% plus. We believe BOB has levers to deliver an ROE of 12-13% in the near term. Delivery on core performance, excluding one-offs, will drive a rerating. The bank trades at 0.8x FY26E P/BV for medium-term RoE of 12-13%. Maintain BUY with a revised TP of INR 280 (from INR 304).
NIM miss; trajectory key for core delivery:
NIM declined 16bps QoQ to 2.94% (9MFY25 NIM at 3.08% below guided range). While NIM was partially hit by absence of interest accrual on large recovery (one-off in Q2FY25), even adjusting for that, it was under pressure and a miss. The business momentum was steady – loan growth of 2.7% QoQ/12.4% YoY, deposit growth of 2.1% QoQ/11.8% YoY, with BOB maintaining FY25 guidance. BoB seems to have limited levers on yield and given pressure on deposit cost, NIM trajectory hereon is key to deliver on core profitability. While BOB is confident of better NIMs, we have factored in lower NIM in our estimates.
Asset quality delivers strong show:
Q3 slippages were at INR 29.2bn (1.1%, down QoQ, a commendable feat). Credit cost was also restricted to 30bps and for 9MFY25 was 47bps. BOB is conservative as regards its full-year guidance and may over-achieve its target. Slippages in the unsecured segments (albeit low size) warrant a watch. The SMA pool has also risen but BOB stated that two accounts have already recovered and thus, SMA pool is sub-20bps as on date. We see resilience on asset quality as the key to deliver ROAs, given that incremental levers on other items are limited.
Maintain BUY with revised TP of INR 280:
The transformation undertaken in the past years has started to yield results. However, there are challenges given recent earnings volatility. We see BOB has levers to sustain 12-13% ROE. That said, we are guarded on volatility. Given higher volatility on core, we prune our target multiple to 0.9x FY27E P/BV (earlier 1x), feeding into a lower TP of INR 280 (earlier INR 304). Having underperformed, the discount to SBI has widened, which may sustain, given underlying concerns about volatility, which will take a few quarters of steady performance. Maintain BUY.
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SEBI Registration number is INH000000933
