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10-11-2024 09:52 AM | Source: Yes Securities Ltd
Buy Bank of Baroda Ltd For Target Rs.330 By Yes Securities Ltd

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Increased provisions in the backdrop of low slippages not concerning

Our view – BOB seems to utilise recovery windfall to make excess prudential provisions

Asset qualitySlippages well under control but BOB made material excess provisions during the quarter: Gross NPA additions amounted to Rs 31.1bn for 2QFY25, translating to an annualized slippage ratio of 1.1%. Gross NPA additions had amounted to 30.18bn in 1QFY25. Provisions were Rs 23.36bn, up by 131.1% QoQ and 8.1% YoY, translating to calculated annualised credit cost of 86bps. Management stated that prudential provisions have been taken on both NPAs and standard assets during the quarter. Importantly, the recovery from technically written off accounts was Rs 25.25bn for the quarter compared with Rs 5.54bn in 1Q. It seems that BOB has ploughed this windfall into provision cover.

Net interest margin NIM declined on sequential basis mainly due to the penal charges rules, while NIM guidance was retained: Global NIM was 3.10%, down -8bps QoQ but up 3bps YoY. The negative impact on NIM due to the penal interest shifting to the fee income line amounted to 5 bps. The bank has once again guided for a NIM of 3.15% plus or minus 5 bps. The cost of deposits has moved up 6 bps QoQ but the impact of deposit repricing is almost over. There will be some cost moderation that can happen in late 3Q or early 4Q. The CD rates have gone down substantially. All of the aspects have allowed the bank to reiterate margin guidance.

Balance sheet growth Balance sheet growth improved on sequential basis, while guidance was slightly reduced in what was more a rear-view mirror action: Whole bank advances grew 7.0%/12.3% QoQ/YoY driven sequentially by Gold Loans, Corporate and ‘Other’ Retail. The bank has reduced its guidance for loan growth from 12-14% to 11- 13% where the endeavor will be to meet the upper end of the band. In 2Q, the corporate yield was sequentially better, allowing the bank to improve corporate loan growth.

We maintain ‘Buy’ on BoB with a revised price target of Rs 330: We value the bank at 1.1x FY26 P/BV for an FY25/26/27E RoE profile of 15.7/15.7/15.7%. We assign a value of Rs 21 per share to the subsidiaries, based on SOTP.

(See Comprehensive con call takeaways on page 2 for significant incremental colour.)

Other Highlights (See “Our View” above for elaboration and insight)

? Opex control: Total cost to income ratio was at 43.6% down by -556/-294bps QoQ/YoY and the Cost to assets was at 1.8% up/down by 7/-5bps QoQ/YoY ? Fee income: Core fee income to average assets was at 0.44%, up/down 7/-9bps QoQ/YoY

 

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