Bank of Baroda shares get ‘Hold’ rating from Jefferies, PT revised to Rs 155

While management continued to highlight improvement in inherent processes and sharper business focus, confidence of translation of these efforts to higher return ratios in the near future remains low, with our estimates suggesting an RoE of ~14% only by FY20. Risk of chunky slippages leading to lower NIMs and higher credit costs continues to remain for the next few quarters. Maintain ‘hold’ with a revised PT of Rs 155.

The total stressed assets increased from 10.8% to 11.7% sequentially. The outstanding balance of SMA-2 accounts still remains high at Rs 93 billion, 2.5% of net advances, vs Rs 80 billion, 2.1% of net advances, q-o-q. The additions to NPA were Rs 52 billion vs Rs 40.8 billion q-o-q and an average quarterly run-rate of Rs 42.9 billion in FY17. The provision coverage ratio was flat.

NII was up 1% y-o-y and was below our estimates on the back of lower than estimated NIM, 2.12% vs. 2.23% y-o-y, which seemed to have been impacted by interest reversal from higher than estimated slippages, slippage ratio of 5.7% on 12-month prior loans vs our estimate of 3.6%. Domestic NIM was down 52 bps y-o-y to 2.48%. The NIM compression more than offset the higher than estimated loan growth, 4.1% y-o-y, to result in a 3.8% lower than estimated NII. Core fee income grew 16.4% y-o-y, ahead of our expectation.

The muted income growth led to the cost to income ratio rising to 46.6% for the quarter vs 45.7% q-o-q and 44.6% y-o-y. The core pre-provision operating profit, excluding treasury income, was down 0.8% y-o-y, and 5% below our estimate.

Credit cost continued to remain elevated, 249 bps of average advances vs our estimate of 132 bps, 215 bps y-o-y and 286 bps q-o-q, leading to a net profit of Rs 2 billion, down 52% y-o-y, 77% below our estimate. We have taken down our EPS estimates, accounting for lower NIM and loan growth in FY18-20 and higher credit costs in FY18. We have increased our fee income growth forecasts for the period. We expect RoE to improve to close to 14% only by FY20. We forecast FY17-20E EPS CAGR of 71% on a muted base.

BOB trades at 1.3x book, June 2017 & 12.3x earnings , 12m to June’18 vs 10-year averages of 1.5x & 6.8x, respectively. PT of Rs 155 is based on 1.2x P/B June ‘18 and 6.7x P/E, 12 m to June 2019. Downside risks: Asset quality deterioration, NIM compression, and growth slowdown. Upside risks: PPOP trajectory improvement.