Bank of Baroda Rating: Buy; Elevated slippages cast shadow on Q3

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January 28, 2020 12:50 AM

FY21/22e EPS down 12/16% due to lower loan growth assumption; ‘Buy’ retained.

Domestic NIMs declined 7bp q-o-q, mainly due to MCLR rate cut (15bp q-o-q). PPoP grew 8.5% y-o-y to Rs 49.6 bn (in line adj. for one-off in opex).

BOB reported a weak Q3FY20, led by higher provisions and elevated slippages as it addressed the RBI divergence and recognised select large corporate accounts as NPLs (including DHFL). Muted business growth and one-offs in opex further drove Q3FY20 loss to Rs 14.1 bn. We have cut FY21/FY22 EPS estimates by 12%/16%, as we factored in assumption of lower loan growth and a slight increase in opex. Maintain Buy.

Slippages elevated due to RBI divergence/HFC account; provisioning coverage stable: BOB reported loss of
Rs 14.1 bn (v/s est.Rs 5.6 bn loss), mainly led by higher provisions of Rs 71.5 bn (+70% q-o-q increase) due to RBI divergence and one-off of Rs 2.7 bn on operating expenses. NII increased 9% y-o-y to Rs 71.3 bn (in-line) aided by improvement in cost of deposits (+16bp q-o-q).

Domestic NIMs declined 7bp q-o-q, mainly due to MCLR rate cut (15bp q-o-q). PPoP grew 8.5% y-o-y to Rs 49.6 bn (in line adj. for one-off in opex). Loan growth was muted at 2.7% y-o-y to Rs 6.5 t; retail loan growth came in at 15.3%. Deposits grew 1% y-o-y to Rs 9.0 t, taking the domestic CD ratio to 69.7%.

Fresh slippages spiked to ~Rs 103.9 bn (in-line) led by slippage from stressed HFC (Rs 20 bn) and RBI divergence of Rs 45.1 bn, leading to an annualised slippage ratio of 7.4%. ~85% of the slippages came in from the watch-list of Q2FY20. Overall, GNPA/NNPA ratio increased 18bp/14bp q-o-q to ~10.4%/4.1%. PCR, including technical write-off, stood at 77.8%. Outstanding watch-list declined to Rs 105 bn (1.6% of loans), SMA-1 stood at 1.5% (+9bp q-o-q) while SMA-2 declined to ~2.1% (+14bp q-o-q).

Highlights from management commentary: The bank has a strong Rs 200-bn sanctioned project pipeline. It expects disbursement trends to improve in corporate lending. RBI divergence of Rs 45.1 bn covers international/domestic corporate portfolios.

Valuation and view

BOB continues to report weak numbers as fresh slippages stay elevated and business growth moderates. The appointment of Sanjiv Chadha as the new MD & CEO (from SBI) removes an overhang; however, outstanding watch-list (1.6% of loans) and SMA-2 assets (~2.1% of loans) in a slowing economy remain a concern. ~29% of corporate advances are either Unrated or have BB & Below rating, which is worrying.

Also, the bank has significant exposure to NBFCs. However, healthy coverage ratio and well- provided NCLT assets (~89% PCR) give us some comfort. We estimate credit cost to remain elevated in FY21 and expect earnings to normalise gradually from 2HFY21. We maintain Buy with revised target price of Rs 115 (0.9x Sep’21e ABV).


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