Bank of Baroda: RoE set to improve to 15.5% in FY16 and FY17

Analysts expect treasury income, loan growth to support earnings

Public sector banks (PSBs) continue to be unpopular with investors, as asset quality is unlikely to improve soon. Bank of Baroda, however, has emerged an outlier after the management has conveyed that while asset quality stress will be higher than in the second quarter due to a rise in loan restructuring, net interest margins are expected to remain stable. The management also expects credit growth to remain 13-15 per cent during the financial year and net interest margins to remain stable at 2.4 per cent.

Even as credit demand from large companies remains subdued, Bank of Baroda has been focused on retail and small and medium enterprise borrowers to grow its loan book. Analysts believe the bank is equipped to grow the loan book at 16 per cent  (compounded annual growth rate or CAGR) over FY14-17, as it is well capitalised. HDFC Securities says in a note: “We believe Bank of Baroda is relatively better placed with higher CRAR (capital to risk weighted assets ratio) of 12.2 per cent. We have factored a 16 per cent loan CAGR over FY14-17.” Other than this, the fall in bond yields is also expected to boost the bank’s treasury income, apart from mark-to-market reversals (revaluing of assets at current prices) in the equity book in the second quarter, which will cushion any impact on earnings. Analysts believe it is better placed than its peers from both a growth and earnings perspective. The bank has tier-I capital of 9.3 per cent, among the best in the segment.

Analysts also believe asset quality is expected to peak ahead of peers, as it has relatively better underwriting. According to Nomura Global Markets Research, the gross slippage level of less than two per cent and net slippage level of one per cent remains one of the lowest among public sector banks and, thus, the comfort on maintaining these low-delinquency levels is positive. The management has conveyed to analysts that the recent restructuring guidelines will have a positive impact on reported delinquencies but a significant leeway given in the recent guidelines could lead to delaying pain in a few cases.

The Street also expects the return on equity to improve to 15.5 per cent in both FY16 and FY17. Hence, the bank’s valuation of one-time price/ September book appears reasonable.