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  1. Maintain ‘neutral’ on Bank of Baroda, target Rs 124

Maintain ‘neutral’ on Bank of Baroda, target Rs 124

BoB reported a net loss of R3,300 crore as it took the full impact of RBI AQR and balance sheet clean-up (NPL slippages 4% of loans).

By: | Published: February 20, 2016 12:33 AM

BoB reported a net loss of R3,300 crore as it took the full impact of RBI AQR and balance sheet clean-up (NPL slippages 4% of loans). Its pre-provisions profit was impacted (down 33% y-o-y) owing to NIM contraction (36 bp q-o-q to 1.7%) and weak fee income (-3%).

Management appears to have undertaken full recognition of stressed loans with total impaired loans increasing to 15% (10% NPL + 5% restricted). NPL cover is down to 43%, problem asset cover is at 30%, and un-provided problem loans (net NPL+restr’d) are now at 100% of NW. As a result, book value erosion has been higher (44% for adjusted book).

Its earning power has diminished as 15% of loans are impaired. Pre-provision profitability has come down to 100 bp, and it will struggle to make double-digit ROEs even with the low credit cost. Management outlined its plan to meet capital needs by improving capital efficiency and selling non-core assets. However, given the weak core profitability and high provisioning need, we think equity dilutions will be needed. We maintain ‘neutral’, cut EPS by 31-37% on higher provisions, and revise down TP to Rs 124.

Management indicated comfort on three key priorities of NPA resolution, capital efficiency, and growth pick-up. It believes capital level is comfortable enough to fund 15-20% growth, as it can meet capital needs through improved capital efficiency and sale of non-core assets. Profitability to remain low, pre-provision profitability has come down to 100 bp and the bank will struggle to make double-digit ROEs even with low credit cost. Equity dilution would further cap ROE improvement.

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