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Brokerages see positive signs on Bank of Baroda’s asset quality; see upside up to 10%

19 May, 2017 9:40 AM
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Brokerages see positive signs on Bank of Baroda’s asset quality; see upside up to 10%

Global and domestic brokerages have a buy or neutral call on the stock on the back of stable numbers as well as better asset quality.

Investors cheered the results posted by public sector lender Bank of Baroda, as the stock soared over 4 percent intraday on Friday.

The lender posted a lower net profit sequentially at Rs 155 crore for the fourth quarter in FY17, down 38 percent from Rs 253 crore in the December quarter. In the March quarter a year ago the Mumbai-based bank had posted a net loss of Rs 3230 crore.

On a yearly basis, the bank made a profit of Rs 1815 crore as against a net loss of Rs 5,068 crore in FY16.

Moneycontrol takes a look at what domestic and global brokerages are talking about the stock.

The brokerage observed that the lender’s earnings were a mess due to higher provisioning in NPAs and other stressed assets, but it saw a better operating performance with strong NII growth and other income. It observed that the asset quality levels were stable with fresh slippages too coming in line with expectations and closer to guided levels.

Based on 1.3 times March 19 average book value, it retained the accumulate guidance.

The bank’s Q4 performance was was largely in line but underlying growth momentum indicates that core PPOP performance should finally turn around in FY18, the brokerage said in its report.

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“Bank of Baroda was early in recognising stress (4 percent unrecognised stress in Mar-17) and has also been early in providing for the stress (coverage of 58 percent). We are still not convinced on management guidance of 30bps NIM expansion and hence maintain a Neutral rating,� the brokerage said in its report. Having said that, it expects credit costs to nearly normalize in FY18F (130bps in FY18F) and expect ROEs of 12-13 percent in FY19F.

The global investment bank believes that the lender is well positioned to capture faster incremental growth from FY18 due to operational efficiency and better asset quality in comparison.

“We expect margins to maintain a positive bias as bank increases the proportion of domestic business. CASA is improving. We cut FY18 EPS estimates by 3 percent, to adjust for FY17 miss. However are positive on better growth and margins,� it said in its report.

The brokerage firm believed that the bank’s profit came in below expectations on the back of higher credit costs. But, the asset quality seemed to be stabilizing, with a delinquency ratio of 4 percent of past year loans.

“BOB’s total stressed loan ratio of 15 percent (NPL of 10.5 percent) and net NPL/net worth ratio of 45 percent are lower than most peers. Casa grew well, but Bank of Baroda will need to improve it further to deliver loan growth among better-quality clients along with higher NIMs,� it said in its report.

The global investment bank pointed that Bank of Baroda’s credit costs remained high, in line with management's intent to raise PCR.

“Among all PSU banks, it is better positioned, with improving NIMs, strong CASA accretion, growth traction picking up and higher comfort on asset quality,� the report added.

Morgan Stanley highlighted that for FY18, the management refrained from giving specific guidance on slippages and credit costs, but expected improvement over F17 – the quantum of improvement will be influenced by pace of resolution and behaviour of some stressed assets.

It projected GNPLs of Rs 44,200 crore next year, assuming slippages of Rs 14,500 crore and recoveries of Rs 9,000 crore.

Bank of Baroda’s profitability remained weak in the March quarter, but some green shoots on loan growth, especially mortgages, and asset quality stability was seen.

PAT of Rs 160 crore was lower than our estimate of Rs 300 crore due to higher provisions, it said.

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