Buy Bank of Baroda; target of Rs 55: Emkay Global Financial

Emkay Global Financial's report on Bank of Baroda

BOB posted a strong earnings beat with a PAT of Rs16.8bn vs. est. loss of Rs2.5bn, mainly due to better NIMs/higher fees and contained provisions. The bank carries better-thanpeers Covid-19 provisioning buffer at 0.26% of loans but more would have been ideal. GNPA ratio was down 25bps qoq to 9.1% due to SC stay on NPA tagging, which otherwise too would have been contained at 9.3%. As a prudent practice, BOB has made provisions @20% on unrecognized NPAs and has deferred interest recognition on stressed loans like select private banks. SMA 1 & 2 book stands at 5.5% vs. 4.3% a year ago. Overall credit growth remains subdued at 5% yoy but retail growth is reaccelerating, driven by Home/Car loans as the bank’s lending rates are competitive in the market. BOB’s Tier I ratio is reasonable at 10.8%, including CET 1 at 9.2% among PSBs, but it plans to raise Rs135bn, including Rs95bn, via equity at an appropriate time.

Outlook

We upgrade the stock to Buy/EW in EAP with a TP of Rs55 (based on 0.4x Dec’22E ABV), factoring in better growth/asset-quality outlook, leading to better earnings momentum, higher retail orientation, reasonable capital position and favourable risk-reward at current valuations among PSBs.

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