Stock corner: ‘Buy’ Bank of Baroda shares, merger impact on net worth met estimate

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Updated: July 8, 2019 3:58:03 PM

BOB has taken a hit of Rs 70 bn of net worth which is broadly in line with what management had indicated.

Bank of baroda, Bank of baroda buy, Bank of baroda stock, Bank of baroda share, Bank of baroda profit loss, Bank of baroda directorThe company’s current disclosure provides certainty against kitchen sinking expectations from the merger.

BOB has declared the opening consolidated balance sheet for FY19 (with Dena/Vijaya). We estimate that BOB has taken a hit of `70 bn of net worth, which is broadly in line with what management had indicated during the Q4FY19 analyst meet. The hit includes provisioning hit/pension/NII hit as balance sheet of Dena/Vijaya are brought on comparable terms with BOB (including provision coverage).

Stock view: BOB’s FY19 consolidated book (ex-revaluation) is `150/share vs `155/share of standalone book (dilution of 3%) and with retained profits could be `190/share by FY21. At current price, the stock trades at 0.65x FY21F book, which we believe is reasonable; hence, we maintain our Buy rating. Like SBI (SBI IN, Buy), we expect positive NIM levers for BOB on a standalone basis, but high NBFC/HFC exposure and recurring PPOP performance of Dena/Vijaya’s book will be key metrics to track. We prefer corporate banks in the financials space—SBI remains our top pick.

Key risks constraining the stock price
Merger related asset quality risks: The company’s current disclosure provides certainty against kitchen sinking expectations from the merger and book value dilution has been only 3%.

Merger related PPoP drags: Like SBI, we believe BOB will also benefit from improving margins on a standalone level. On the consolidated level, we factor in a similar PPOP profile for Vijaya/Dena as their FY18 numbers—with `70 bn of reduction in net worth, there could be some risk to our Dena + Vijaya PPoP estimates. We await clarity on that in Q1FY20 numbers.

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