Bank of Baroda reported a PAT of Rs. 730 crore (our estimate: A loss of Rs. 1,200 crore) as the bank continued with the existing tax regime and thus no adjustments were required in DTA. Other income was supported by higher treasury gains of Rs. 940 crore. PBT stood at Rs. 1,130 crore (in line). For H1FY20, PPoP grew 13.8% y-o-y to Rs. 9,610 crore, whereas PAT stood at Rs. 1,450 crore versus Rs. 100 crore in H1FY19. NII increased 10% y-o-y (+8.2% q-o-q) to Rs. 7,030 crore. Global NIM expanded 20bp q-o-q to 2.8%, while domestic NIM too improved by 20 bp q-o-q to 2.95%. PPoP increased 23% y-o-y to Rs. 5,330 crore (our estimate: Rs. 4590 crore).

Loan book growth was muted at 3% y-o-y (+0.7% q-o-q) to Rs. 6.4 lakh crore. Retail loan growth remained strong at 16.2%. Within retail, home/auto loans grew at 13%/33% y-o-y. Total deposits increased 2% y-o-y to Rs. 8.9 lakh crore, taking the domestic CD ratio to 68%. Domestic CASA grew 7.5% y-o-y, resulting in an increase in the CASA ratio to 37.9%. Fresh slippages elevated to Rs. 6,000 crore, leading to an annualised slippage ratio of 6.7%. Around 90% of the slippages came in from the watch-list of Q1FY20. The GNPA/NNPA ratio fell 3bp/4bp q-o-q to 10.3%/3.9%. PCR, including technical write-off, stood at 77.9%. Other highlights: O/s watch-list stood at Rs. 14,500 crore. CET-I/Tier-I stood at ~9.8%/10.9%. SMA-2 increased to 1.6% from 1.5% in Q1FY20, while SMA-1 increased to 2.2% from 2.1% in Q1FY20.

BOB has reported a modest quarter with tepid loan growth, but margins have expanded considerably. We nevertheless expect fresh slippages to remain elevated in FY20 (3.7%), driven by the merged entity’s exposure to various stressed groups and uncertain macros, before moderating in FY21. The clarity on appointment of MD & CEO is going to be critical as the term of current CEO has got over. We estimate credit cost to remain elevated at 2.3%/1.4% in FY20/21. Thus, we expect the merged entity to deliver 0.8%/12.0% RoA/RoE for FY21. We maintain our ‘buy’ rating with a revised target price of Rs. 120 (0.9x FY21E ABV).