Q2FY24 Review: Bank of Baroda: Margins contract; recoveries drive PAT beat

6 Nov 2023 , 02:42 PM

BoB’s Q2 reported PAT was 7%/12% ahead of consensus/IIFLe on the back of better fee income and TWO recoveries from ILFS. Adjusted for the recoveries, bottom-line was 1%/6% below IIFLe/consensus. Mar gins contracted by 20bps due to rise in CoF, and the bank cut its FY24 NIM guidance by 15 bps to 3.15%. Two corporate accounts viz. GoFirst (Rs17bn) and a Middle-East based real estate account (Rs5bn) slipped into NPA, which led to higher credit cost. Analysts of IIFL Capital Services cut their FY24-25 estimates by 3-5% on lower NIMs, and retain TP of Rs205 with a REDUCE rating. The recent RBI embargo and relatively-weaker liability franchise are the medium-term growth concerns. 

Strong retail led growth; margins disappoint. 

Loan growth of 3% QoQ/17% YoY was led by retail and international growth, while corporate growth continued to lag. Asset yields were flattish, while cost of deposits rose 24bps due to TD re-pricing, leading to 20bps of NIM compression. With most of MCLR linked re-pricing already done, analysts of IIFL Capital Services expect only marginal improvement in loan yields. With further residual rise in funding cost, they expect margins to remain range-bound in H2. 

One off in non-II; slippages elevated. 

Bank received Rs5bn of recovery from ILFS which coupled with strong core-fee income led to 26% QoQ growth in non-II. Bank expects another Rs20bn recoveries in H2 which shall support FY24 earnings. Two corporate accounts (GoFirst and international real estate account) slipped into NPA in the quarter, and underpinned 2% gross slippage ratio and 90bps credit cost. Analysts of IIFL Capital Services expect credit costs to inch-up over FY24-26E from current low levels. 

Retain REDUCE. 

Analysts of IIFL Capital Services expect BoB to lose market share to larger private banks and forecast lackluster profit growth of 7% Cagr over FY24-26E and avg. RoA/RoE of 1%/14% respectively. The recent RBI embargo and relatively-weaker liability franchise are the medium-term growth concerns that underpin analysts of IIFL Capital Services REDUCE rating. They value the bank at 0.8x Sep’25 BV to arrive at a TP of Rs205.w