Bank of Baroda stock correction offers an opportunity for value investors

Bank of Baroda (BoB) declared higher profits, partially boosted by a rise in non-recurrent other income. But much to the Street’s disappointment, net interest margin (NIM) guidance declined, and gross non-performing assets (GNPAs) rose. Core pre provision operating profit (PPoP) was at Rs 6,090 crore and net interest income (NII) met expectations at around Rs 10,830 crore.

Fee income was up 16 per cent. The bank reduced its NIM guidance for financial year 2023-24 (FY24) -- from 3.3 per cent to 3.15 per cent as deposit costs rose. The NIM for the second quarter of FY24 (Q2FY24) was 3.16 per cent. Loan growth guidance is at 14-15 per cent and BoB is trying to cut its reliance on wholesale deposits.

Loan growth was at 3.6 per cent quarter-on-quarter Q-o-Q and 19.3 per cent year-on-year (Y-o-Y). Deposit growth was up 14.6 per cent Y-o-Y. Other income was at Rs 4,170 crore due to higher fees and dividend income. Operating expenditure was lower than expected at Rs 7,000 crore. The PPoP was Rs 8,020 crore, while core PPoP was at Rs 6,090 crore. Fee income at Rs 2,240 crore was driven by corporate fees. Net profit was at Rs 4,253 crore, while core net profit was at Rs 2,850 crore.

The GNPA/net NPA (NNPA) were at 3.32 per cent and 0.76 per cent respectively with higher slippages partly compensated by good recoveries. GNPA additions were Rs Rs 4,751 crore (annualised NPA addition ratio of 1.9 per cent) and recoveries and upgrades were Rs 2,207 crore.

Two key stressed loans include an aviation loan (Rs 1,770 crore), and a West Asia based real estate account, both of which became NPAs. Provisions were at Rs 2,160 crore. The provisioning coverage ratio (PCR) remained adequate at 78 per cent. Investor perception may swing positive if these two slippages are not indicative of a trend.

Recoveries from written-off loans were good at Rs 1,230 crore, and trading gains were at Rs 300 crore, along with a revaluation of investments of Rs 180 crore. Non-core fees contributed to 0.5 per cent to return on assets (RoA). Credit cost rose to 93 bps from 71 bps in Q1FY24. The RoA stood at 1.1 per cent with a guidance of 1 per cent for full year FY24.

Sequential loan growth at 3.6 per cent was led by overseas (up 6.4 per cent), retail (5.2 per cent), and small and medium enterprises (3.9 per cent). Retail loans were led by home, auto, and personal segments. The growth guidance of 14-15 per cent for FY24 includes guidance for corporate loans at 12-13 per cent, retail (20-22 per cent), and overseas at 15 per cent. The targeted corporate to non-corporate loan mix for FY26 is 35:65 (it is now 42:58). The bank would like to reduce the operating expenditure to income ratio to 45 per cent from the current 46.5 per cent.

Deposit accretion (4.1 per cent Q-o-Q) was led by domestic (3 per cent) and overseas (17.3 per cent). On the term deposit side wholesale deposit share is high at 30 per cent, but this may decline as and when the repo rate eases. BoB hopes to contain the cost of deposit by an aggressive targeting of current accounts and savings accounts (Casa) and a reduction in wholesale deposits. The bank is working to comply with RBI directives that restrict the use of the BOB World app and hopes the ban would be lifted soon, improving ease of access to services for retail customers. The stock dropped by 4 per cent, which may make it attractive for value investors.