Bank Of Baroda - Stock Valuation and Financial Performance

Market Cap 84,267Cr
CMP 163
P/B 0.8xFY23

Check 10 year X-ray here

Key Highlights -

• Retail loan book (18.14% of advances) grew by 28.4% on yearly basis, within retail personal grew (13.32%) by 172.8% and other grew by double digits.
• Asset quality improved with GNPA decline by 2.8% at 5.31%, and NNPA decline by 1.67% at 1.16%.
• Cost to Income ratio increased by 0.61% to 49.74%, treasury losses 435 Cr.
• Deposit base grew by 13.6%, while CASA declined to 39.83% from 41.70% on yearly basis.

Management Outlook –

• Management guided on improving NIM by 0.10% and advantages of loan repricing for next 2 quarters.
• Credit cost to decline to 1-1.25%, while slippages to be at 1.5-2% for this fiscal.
• Management guided on Return of asset (ROA) to be below 1% this year, while expecting to achieve ROA of 1% and ROE of 15% next year.

Results

Bank of Baroda loan growth stood at 8.5% Year on Year, mainly due to growth in corporate loans domestic and overseas in addition to retail growth of 13.5%. Domestic CASA ratio is healthy at 39%. Gross NPA stayed at 9.4% due to new slippages from overseas accounts, while net NPA is now at 2.8%. Provision coverage ratio of 72%. Overall 21% of total loan value is under moratorium, which poses risk to rise in NPA.

Currently all banks are reporting stable performance due to i) Moratorium offered to clients ii) Cost cuts. For some banks it is relatively easy to calculate NPA accretion while others they have complex lending structure. We will reassess over next few quarters which bank has fared well.

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For some clients we had recommended Bank of Baroda (BoB) on the basis of good CASA, improving ROE over time as NPAs come down and favorable valuation.

Currently, there is a fear of Telecom and NBFC NPAs propping up, hence leading to fall in BoB’s stock price. BoB has ~2-3% exposure to NBFCs with lower credit rating. rest 5% is to AAA rated PSU NBFCs.

Apart for initial 3% we do not recommend averaging the stock. If it indeed remains a loser in portfolio, we don’t want to average down and compound the mistake.

Our other investments in banking stocks have turned out quite well, eg. Axis Bank, ICICI Bank, SBI. So the drop in BoB wouldn’t hamper overall portfolio returns much. 

Results:  Bank of Baroda (BoB) reported 50% increase in net interest income* and total income respectively year on year. The CASA^ ratio increased to 39% (vs 36% in Q2FY20). 

Key Highlights:-

Net loan book grew by 3% and deposits grew by 1% year on year. Advances in the retail segment grew at 15% year on year.

Within retail loans, home and auto loans grew by 10% and 43% respectively.

Gross NPA reduced to 10.43% (vs 10.91% in Q3FY19) however, the fresh slippages** during the quarter were high at Rs. 10,387 Cr. The slippage ratio increased from 3.65% in Q3FY19 to 6.78% in Q3FY20. Net NPA stood at 4%. 

Bank added 21 branches during Q3FY20, adding up total branches to 9,470 and 13,161 ATMs. 31% of the bank branches are in rural area and 23% in metro areas.

Outlook: The major cause of concern was growth in slippages including NPA from RBI divergence. Since 80% slippages are from Watchlist, there is not incrementally negative. The management expects NPA to come down below 4% in next quarter. 

* Net Interest Income (NII) - Total interest earned by a bank on lent amount minus Total interest that it expended on its deposits.

^CASA- Current Account Saving Account is essentially the lowest cost funds that are available to the bank to lend. More the CASA, higher the amount of fund the bank can lend and earn interest on it.

**Slippages- The defaulted loans

Results:  Bank of Baroda (BoB) reported 10% increase in net interest income* year on year. Operating income before provisions grew by 23% year on year. The CASA^ ratio remained high at 36.55%. 

Key Highlights:-

• Net loan book grew by just 3% year on year as core loan growth was negated by reduction of bad loans. Advances in the retail segment grew at 16% year on year.
• The credit cost for the bank was high at 2%. The credit cost elevated because of high slippages** at 4.2% of advances.
• Despite of slippages, net NPA remained stable at 3.9% as recoveries improved. ~90% of corporate slippages came from the Bank’s predefined watch list. 
• Major chunk of corporate slippages of Rs3400 Cr mainly came from NBFC, Sintex group and Cox&Kings sector.

Outlook: From a lower base, both recoveries from written-off accounts normalized during the quarter to higher levels, aiding the Bank’s profitability as well as asset quality. Slippages from the MSME portfolio remained elevated, with higher share of MSME and mid corporate slippages from erstwhile Dena and Vijaya bank’s books (which merged with BoB). BoB continues to receive funds from government to make provisioning. This has led to equity dilution and reduction in fair value of BoB.

We have a BUY on BoB. We believe, that there is gradual improvement in core operating metrics, integration-related challenges is expected. Currently we have bought it as a part of overall basket of corporate banks. Other banks have already delivered however, Bank of Baroda is done reverse in term of performance. From today’s price we do expect much more than 15% CAGR but still recommend to buy other corporate banks like SBI, Axis Bank, too.

* Net Interest Income- Total interest earned by a bank on lent amount minus Total interest that it expended on its deposits.

^CASA- Current Account Saving Account is essentially the lowest cost funds that are available to the bank to lend. More the CASA, higher the amount of fund the bank can lend and earn interest on it.

**Slippages- The defaulted loans