Merger Overhang Remains A Key Concern; Maintain HOLD
Bank of Baroda (BoB) has delivered a strong performance on asset quality front in 2QFY19, marked low fresh slippage of Rs22.8bn for seventh successive quarter. It’s PCR – including technically written-off accounts – sequentially improved to 70.75%, which excluding technically written-off accounts stood at 61.79% in 2QFY19 vs. 69.11% and 59.94% in 1QFY19. The Bank’s NII grew by 20.8% in 2QFY19 led by strong growth in loan book and relatively stable NIMs of 2.61%. Further, its core fee-based income remained strong ((+14.3% YoY and +12.3% QoQ) at Rs9.6bn. Domestic credit grew by 20.4% led by retail loans, which grew by 33.6% YoY. Within retail loans, home and auto loan grew by 39.8% YoY and 38.8% YoY, respectively. However, its PAT missed our estimate owing to relatively higher provisioning expenses towards exposure to IL&FS group and other stressed assets.
Management Commentary & Guidance
* Though the loans under SMA2 category increased on sequential basis, these accounts are granular in nature and the Bank is working to contain fresh slippages from this segment in 2HFY19.
* The RBI has taken 160 accounts of the Bank for review under AQR and the report of which is yet to come. Most of these exposures are part of the watch list of the Bank.
* The Bank is showing strong growth in fee-based income particularly from the category which does not require allocation of risk capital. Over the last few quarters, the Bank has taken several measures to boost segmental income.
* Most of the exposure of IL&FS group is towards project finance and the Bank sees concern for 2 loans towards IL&FS’ financial service arms. During 2QFY19, the Bank provided Rs2.4bn towards its exposure to IL&FS.
* With regard to the proposed amalgamation of Vijaya Bank and Dena Bank with Bank of Baroda, the Management expects to complete share swap ratio by the end of Nov’18.
Outlook & Valuation
The proposed merger of 2 other PSU banks with the Bank may further keep the investors away from these banks due to merger-related concerns. Hence, expecting continued weakness in the stock till merger related issues get resolved, we maintain our HOLD recommendation on BoB with a revised Target Price of Rs112 (from Rs102 earlier).
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