Asset quality outlook improving; upgrade to BUY: Bank of Baroda (BOB) reported a strong earnings performance, supported by a healthy core operating performance, despite sluggish business trends. Domestic NIM improved sharply by 39bp QoQ to 3.12%. Asset quality trends were stable sequentially in a challenging environment, with fresh slippage at Rs 51.3 billion (annualized slippage rate of 3.1%).
However, higher write-offs and upgrades resulted in stable asset quality trends – the GNPA/NNPA ratio declined 1bp/6bp QoQ, while PCR was broadly stable at ~68%. Also, total SMA 1/2 (>Rs 50 million) declined to ~2.68%, while the restructured book stood at 3.2% of loans. Collection efficiency (ex-Agri) was stable QoQ at 93%, better vis-à-vis many other peers. We increase our earnings estimates by 47%/22% for FY22/FY23E and estimate RoA/RoE of 0.7%/10.3% by FY23E. We upgrade our rating to BUY.
Strong NII drives earnings beat; asset quality steady: BOB reported a profit after tax (PAT) of Rs 12.1 billion (significantly above our estimate), led by a healthy core operating performance, with NII growing 16% YoY (11% QoQ; 10% beat to MOSLE). Domestic NIMs improved sharply by 39bp QoQ to 3.12%. Other income grew ~63% YoY (~39% QoQ decline) to Rs 29.7 billion, affected sequentially by weak disbursements. Thus, core fee income declined ~33% QoQ (up 22% YoY). Thus, total operating revenues grew ~26% YoY (in-line). Opex grew 12% YoY to Rs 51.5 billion on account of a 21% increase in employeerelated expenses. Thus, the C/I ratio stood stable QoQ at 47.5%. PPOP grew ~41% YoY to Rs 57.1 billion (28% beat).
On the business front, the COVID wave 2.0 significantly hampered economic activity. As a result, advances declined ~5% QoQ (~3% YoY decline). Among the segments, Retail growth came in at 11.8% YoY (flat QoQ), while the Corporate book plunged ~12% YoY (~11% QoQ decline). The MSME portfolio also declined 5% QoQ. Within Retail, Home/Auto grew 8%/25% YoY. Deposit growth was flat YoY (down ~4% QoQ). CASA growth came in at 12.8% YoY, and the domestic CASA ratio thus improved to 43.2% (v/s 42.9% in FY21).
Highlights from the management commentary: Restructuring 1.0: Retail (Rs 10.25 billion) and corporate (Rs 100.25 billion) of which ~Rs 30 billion is non-fund. Bank carries provision of Rs 12.57 billion (15% on fund based). Restructuring 2.0: Retail (Rs 38 billion) and SME (Rs 5.62 billion). Bank carries provision of Rs 6.3 billion. Restructuring for MSME stands at ~Rs 95 billion. The bank endeavors to keep the slippages for FY22 below 2%. Overall, the bank expects total recoveries of ~Rs 140 billion in FY22.
Valuation and view: BOB reported a healthy earnings performance, supported by strong NII and sharp improvement in domestic NIMs. The margin expansion was supported by an improving asset mix, as retail growth held strong, while corporate loans declined 11% QoQ.
The bank expects growth to pick up, led by retail segments, while corporate growth would see gradual recovery as the economic situation normalizes. The bank reported stable asset quality in a challenging quarter, with stable CE at 93%. Furthermore, SMA 1/2 declined to ~2.7% of loans. We increase our earnings estimates by 47%/22% for FY22/FY23E and estimate RoA/RoE of 0.7%/10.3% by FY23E. Therefore, we upgrade our rating to BUY, with revised TP of Rs 100 (0.7x FY23E ABV).