Bank of Baroda rating – Reduce: Performance in Q4 was better than expected

BOB reported a loss owing to deferred tax adjustment as it moved to a lower tax rate regime. Core PPOP (excluding treasury gains), however, grew at 26% y-o-y, 8% above our estimate. This was driven by 4.5% y-o-y growth in NII, 71% y-o-y growth in non-interest income, offset by 26% y-o-y growth in expenses. NII was impacted by interest write-off on account of slippages as well as compound interest for loans>Rs 20 mn.

Gross slippages were at ~Rs 123 bn (7.1% slippage ratio on 12m prior loans) which includes proforma slippages of Rs 86 bn, resulting in net Q4 slippages of ~Rs 4 bn. BOB’s slippages in retail and MSME and outstanding NPL ratios, as well as overall SMA portfolio, is much weaker as compared to SBI. Separately, the stress in the book is mainly in the lower ticket retail and MSME segment, which makes us a bit cautious. We, therefore, maintain Reduce with our TP revised up to Rs 75.

Asset quality held up better, stress mostly in small ticket retail & MSME: Gross and net NPL declined to 8.87% and 3.09% compared to proforma gross and net NPL of 9.63% and 3.36%, respectively, in Q3. Gross slippages were at ~Rs 123 bn. SMA1 and SMA 2 for ticket size above Rs 50 mn stood at 3.87%. Collection efficiency for Mar’21 stood at 93% vs 92% in Q3FY21. The bigger worry for BOB is the stress build-up in the smaller ticket loans where the SMA1 and SMA2 totalled to 8.1% vs 4.4% for ticket size > Rs 50 mn, as of Dec’20.

Asset quality weaker compared to SBI: Outstanding NPL ratio for BOB is substantially higher than SBI e.g. in corporate 10.3% vs. 5.6%, in MSME 13.5% vs 7.7% and in retail 2.3% vs. 0.8%. Similarly, new NPL formation for BOB is quite elevated vs. SBI across all segments barring agriculture. Likewise, the SMA 1 and SMA2 for above-Rs 50-mn loans, is significantly higher at 3.9% for BOB vs. 0.45% for SBI.

PPOP growth held up, balance sheet growth weak: Core PPOP was up 26% y-o-y driven by one-off NCLT recovery. Global NIM declined by 5bp q-o-q at 2.72%. Domestic CASA ratio improved to 42.9%. Loans grew 2.3% y-o-y.

Change in estimates, valuation fair: We expect FY23F RoE at 14.5%. The stock trades at 0.62x P/B on FY21. Our TP of Rs 75 implies P/B (FY22F) of 0.5x and P/E (FY23F) of 3.5x.