Bank of Baroda Rating | Reduce — Performance in quarter was stable

A steady core and curtailed incremental stress are the key characteristics of Bank of Baroda’s (BoB’s) Q4FY19 results. That said, higher provisions (due to seasoning and a markdown of a few assets) led to a loss of `9.9 bn.

Key highlights: (i) Slippages were restricted at `37.5 bn (3.3%, >30% from corporate book, largely IL&FS). Though coverage improved to about 67% and NNPLs fell to 3.3%, the exposure to DHFL, ADAG, etc. raises concern. (ii) Core operating profitability continues to improve given better NII (up >25% y-o-y) and controlled opex. While FY19 core performance shows stability, we believe the proposed merger entails costs and softer issues, and will take time to be consummated. We believe BoB’s post-merger operating metrics are at risk in the near-medium term with sub-optimal returns ratios (RoA/RoE of < 0.5%/7% even in FY21). Maintain Reduce with a TP of `113. Asset quality moves along guidance Slippages were restricted at `37.5 bn (3.3%) driven by corporate (IL&FS of `5.3 bn). This along with higher write-offs pushed GNPLs down 9% q-o-q to `482 bn. That said, we anticipate post-merger challenges to surface in: (i) alignment of stress pools and exposures to stressed groups; and (ii) alignment of provision coverage (Dena/Vijaya at 53%/35% in 9MFY19 and BoB at >67%). We believe this would translate into higher aggregate provisioning cost of about `30 bn.

Merger integration cost to reduce earnings visibility

We believe the merger will take two-three years, if not more, to consummate. Synergy benefits are generally far-ended while costs have to be borne upfront. This would impact earnings visibility. Management indicated that the merger could cost closer to the recent government infusion of `50 bn (we earlier estimated `54 bn).

Bank Of Baroda