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Strong recoveries drive earnings beat; loan growth steady

RoA guidance maintained at 1.1%

* Bank of Baroda (BOB) reported 2QFY25 PAT of INR52.4b (14% beat), up 23% YoY/17.5% QoQ, driven by strong recoveries from TWO pool. NIM contracted 8bp QoQ to 3.10% due to the 5bp impact of penal charges in 2Q.

* Provisions came in higher amid the creation of prudent NPA provisions. Business growth was healthy, led by faster growth in loans at 12.3% YoY/7% QoQ, while deposit growth was steady at 9% YoY/4% QoQ. Thus, the CD ratio rose to 82.2%, while LCR declined sharply to 123.7% (vs. 138% in 1Q).

* Slippages inched down to 1.1%. GNPA declined 38bp QoQ to 2.5%, while NNPA stood largely flat at 0.6%. PCR declined marginally to 76.3%.

* We cut our FY25/FY26 EPS estimates by 4.7%/4.8% as provisions rise. We estimate FY26 RoA/RoE at 1.1%/15.7%. Retain BUY with an unchanged TP of INR290 (1.2x FY26E ABV).

Business growth healthy; credit cost guidance maintained at 0.75%

* PAT grew 23% YoY/17.5% QoQ to INR52.4b, led by higher other income, which was partially offset by higher provisions. NII was in line, while NIMs contracted 8bp QoQ to 3.1% due to the 5bp impact of penal charges in 2Q. 1HFY25 PAT stood at INR96.9b (up 16.5% YoY), and we expect 2HFY25 PAT at INR88.5b (down 6% YoY).

* Other income jumped 24% YoY/108% QoQ to INR51.8b (71% beat), thanks to higher recovery from TWOs and better fee income. Opex rose 6% QoQ (4.9% YoY, 4% higher than MOFSLe). PPoP, thus, grew 18% YoY to INR94.8b (26% beat on MOFSLe).

* Provisions increased 8% YoY/131% QoQ to INR23.4b (73% higher than MOFSLe), as the bank created prudent NPAs and standard assets provisions. BOB expects the annualized credit cost to remain contained at <0.75%.

* Advances grew at a healthy 12% YoY (up 7% QoQ). Among segments, corporate book picked up faster at 9.4% QoQ, while retail loans grew 4.4% QoQ (20% YoY). SME/Agri book grew 5.7%/3.8 QoQ. In Retail, home loans rose 4% QoQ, auto loans grew 4.7% QoQ, personal loans grew 4.5% QoQ, and gold loans grew at 5.9% QoQ during the quarter.

* Deposits grew 9.1% YoY/4.3% QoQ after a blip in 1Q, while SA grew at a slower pace of 1.3% QoQ. Domestic CASA mix thus declined to 39.8% (down 78bp QoQ), while bulk deposits grew faster at 11.1% QoQ.

* On the asset quality front, slippages moderated to 1.1%. However, healthy credit growth and accelerated w-offs led to 38bp QoQ decline in the GNPA ratio to 2.5%, while the NNPA ratio declined 9bp QoQ to 0.6%. PCR fell slightly to 76.3%, while SMA 1/2 increased 29bp QoQ to 47bp.

* RoA improved to 1.3% in 2Q, while RoE came in at 19.22%.

Highlights from the management commentary

* Deposit growth remains challenging, with the bank adjusting its guidance to 9- 11% from the earlier 10-12%.

* Loan growth guidance is revised to 12-13% from 12-14% due to a moderation in the international book, though the bank aims to exceed this target.

* The bank maintains its previous NIM guidance at 3.15% (+/- 5bp) and anticipates a decline in the cost of deposits.

* Credit cost is projected at 0.75%, and the slippage ratio at 1-1.25%.

* NIMs declined due to a 5bp impact from penal charges.

* RoA guidance stands at 1.1%.

Valuation and view: Reiterate BUY with a TP of INR290

BOB reported a healthy quarter, characterized by higher other income amid accelerated recoveries from TWO. Provisions were higher than expected as the bank created prudent NPAs and standard assets provisions. BOB guides for a controlled credit cost of 0.75% for FY25, which should support the return ratio of 1%+. Margin contracted 8bp QoQ, as the bank saw a 5bp impact due to penal interest. Business growth picked up, led by broad-based loan growth across corporate and retail segments, while deposit growth too was healthy. Slippages were under control at 1.1%, while the NNPA ratio came down to 0.6%. We cut our FY25/FY26 EPS estimates by 4.7%/4.8% due to higher provisions, while we expect loan growth to be healthy and NIMs to be maintained at 3% for FY25 and FY26. We estimate FY26 RoA/RoE at 1.1%/15.7%. Reiterate BUY with a revised TP of INR290 (premised on 1.2x FY26E ABV).

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