Buy Bank of Baroda Ltd for the Target Rs. 300 By Prabhudas Liladhar Capital Ltd
Incremental asset mix in H2FY26 key to NIM
Quick Pointers:
* Steady quarter with better reported NIM, opex and asset quality.
* Corporate growth expected to pick-up; we are watchful of NIM.
BOB saw a steady quarter; while NII was 1.8% lower due to back-ended loan growth, reported NIM adjusted for IT refund was flat QoQ at ~2.85% which was a positive, given NIM was expected to fall. Bank is expecting a pick-up in credit accretion in H2FY26 led by corporate. We are watchful of NIM given corporate growth could be a drag on NIM. Asset quality continues to remain healthy that led to write-back in credit costs of Rs8.0bn which allowed the bank to create floating provision of Rs4bn (Rs10bn in H1FY26) so as to shift gradually towards ECL. Bank expects impact of 125/25bps on CRAR/credit cost due to ECL while positive impact due to risk weight circular could be 60bps. Floating provision as of Sep’25 was ~8bps. We keep multiple at 1.0x but raise TP to Rs300 from Rs270 as we roll forward to Sep’27 ABV. Retain ‘BUY’.
* Core PAT beat due to better asset quality; NII/fees were lower: NII was lower at Rs111.8bn (PLe Rs113.8bn) as NIM (calc.) adjusted for IT refund was a slight miss at 2.65% (PLe 2.70%). Reported NIM adjusted for one-off was flattish QoQ at ~2.85%. Loan/deposit growth were in-line at 12.2%/10.0% YoY. CASA ratio was 32.6% (33% in Q1FY26); LDR increased QoQ to 83.9% from 82.7%. Other income was lower at Rs35.1bn (PLe Rs36.6bn) due to lower fees and TWO recovery. Opex at Rs78.9bn was 3.4% below PLe led by lower staff cost. Core PPoP at Rs58.3bn was 8.6% below PLe. PPoP was Rs75.8bn. Asset quality improved; GNPA fell by 12bps QoQ to 2.16% (PLe 2.13%). Slippages were lesser at Rs30.6bn (PLe Rs35.8bn); recoveries accelerated to Rs9.9bn (PLe Rs7.5bn). Provisions were lower at Rs12.3bn (PLe Rs18.7bn). Core PAT was 5.9% above PLe at Rs34.8bn. PAT was Rs48.1bn.
* Credit growth was broad based: Sequential growth was broad based across segments: corporate 8.2%, retail 4.5%, SME 6.4% and agri 4.9%. Management suggested that corporate book is expected to pick-up in H2FY26 also led by NBFCs. Asset quality continues to remain healthy which led to lower credit costs. This allowed the bank to create additional floating provisions of Rs4bn (Rs6bn in Q1FY26) so as to transition to the ECL model. Bank expects impact of 125/25bps on CRAR/credit cost due to ECL while positive impact due to risk weight circular could be 60bps. Hence net impact from ECL and riskweights circular could be 75bps that would be allowed to spread over 5 years. We are factoring 61bps of provisions for FY27/28E (51bps in FY26).
* Reported NIM was flat QoQ: Interest on IT refund in Q2’26 was Rs7.0-7.5bn (Q1FY26 Rs3.9bn) adjusted for which NIM was flattish for the quarter which was a positive, considering that NIM was likely to decline QoQ. However, NII was lower due to back-ended loan growth. NIM for FY26 is guided at 2.85- 3.00%. MCLR share is 30-35%. Cut in MCLR rate depends on moderation in cost of deposits and it is automatically passed onto customers. Our core NIM estimates don’t change materially.
Please refer disclaimer at https://www.plindia.com/disclaimer/
SEBI Registration No. INH000000271
