Company Overview:

Bank of Baroda (BoB) was founded by Maharaja Sayajirao Gaekwad in July 1908. The bank is an Indian state-owned International banking and financial services company headquartered in Vadodara (earlier known as Baroda) in Gujarat, India. Its headquarters is in Vadodara and it has a corporate office in the Mumbai. Vijaya Bank and Dena Bank amalgamated into Bank of Baroda with effect from April 1, 2019. The amalgamation provides significant long-term benefits to the Bank and its customers. The bank has been investing in technology to improve customer experience. Initiatives such as digitising account opening through TAB Banking, revamping its mobile application, centralisation of back office operations, setting up an Analytics Centre of Excellence (ACoE) and Baroda Kisan platform for its farmers are efforts in that direction. It is expanding its digital focus even further with setting up of a dedicated Digital Lending Department which will exclusively cater to digital on-boarding and processing of loans for Retail and MSME customers using internal and external sources of information and state-of-the-art machine learning and algorithms. The Bank is proactive in its approach towards empowering the unbanked segment by offering suitable financial products & services and making them financially literate. The Bank is consistently working towards strengthening the financial inclusion initiatives by leveraging the Government’s Digital programmes.

Industry Overview

As per the Reserve Bank of India (RBI), India’s banking sector is sufficiently capitalised and well-regulated. The financial and economic conditions in the country are far superior to any other country in the world. Credit, market and liquidity risk studies suggest that Indian banks are generally resilient and have withstood the global downturn well. The Indian banking industry has recently witnessed the rollout of innovative banking models like payments and small finance banks. In recent years India has also focused on increasing its banking sector reach, through various schemes like the Pradhan Mantri Jan Dhan Yojana and Post payment banks. Schemes like these coupled with major banking sector reforms like digital payments, neo-banking, a rise of Indian NBFCs and fintech have significantly enhanced India’s financial inclusion and helped fuel the credit cycle in the country. Indian Fintech industry is estimated to be at US$ 150 billion by 2025. India has the 3rd largest FinTech ecosystem globally. India is one of the fastest-growing Fintech markets in the world. There are currently more than 2,000 DPIIT-recognized Financial Technology (FinTech) businesses in India, and this number is rapidly increasing. The digital payments system in India has evolved the most among 25 countries with India’s Immediate Payment Service (IMPS) being the only system at level five in the Faster Payments Innovation Index (FPII). India’s Unified Payments Interface (UPI) has also revolutionized real-time payments and strived to increase its global reach in recent years.

Technical view: Bank of Baroda ltd:

Technically Bank of Baroda took major support near trend line support near levels of 232-234 so that will act as major support in coming weak and upside stock is facing major selling pressure near 354-360 zone that will act as immediate resistance. So we suggest to buy BOB and add all dips with immediate support near levels of 216-220 in near term and hold for fresh targets of 274-310 in short to medium term over a period of 1 year.

Key Results Highlights

Asset quality remains robust; credit cost to remain well within guidance:

BoB’s GNPA improved to 2.9% in FY24 from 9.4% in FY20. With no notable stress across most lending segments and healthy collection efficiency, we estimate continued improvement in GNPA ratio, projecting it to reach 2.4% by FY27. Fresh slippages are likely to stay in control (SMA 1/2 stands at 18bp) while the bank has guided for recoveries and upgrade of INR100b from GNPA. Further, the credit cost is likely to stay well within the guided range ( < 0.75%) while PCR sustains at healthy 77-78%. However, we remain watchful on the final ECL guidelines and resultant provisioning requirements for the PSU banking space.

Operating expenses growth to remain controlled; C/I ratio to improve to ~45% by FY27:

Opex growth is likely to moderate after a surge in FY24, which will enable sustained improvement in cost ratios over FY25-FY27. The bank’s opex is expected to post a 9% CAGR over FY26/27 (flattish in FY25 on a high base) while revenues are expected to clock 11% CAGR during the same period, with a distinct focus on driving up the traction in fee income, where BOB currently trails its peers and has significant potential for improvement. We, thus, expect C/I ratio to decline from 47.7% in FY24 to 45.1% by FY27.

Earning Calls key highlights:

Guidance: Overall loan growth target maintained at 12-14%, with deposits growth at 10-12%. NIM guidance at 3.15% for FY25 with a deviation of 5 bps. RoA guidance increased at 1.1%. Slippage guidance at 1-1.25%. Credit cost guidance at ~75bps vs > 1% earlier. C/D ratio expected at 80-82% and should be at the lower end of band. Order of priority for the bank- asset quality, profitability and then growth. ECL impact is unlikely to be significant on profitability.

Margins: Sequential NIM increased by 4 bps QoQ ex of one-off recoveries in Q4. Liability management has helped margin protection. Advances: Loan growth weakness partly owing to liability management where the bank has done away with high-cost bulk deposits. CoF were therefore stable QoQ. Incremental focus will be on growing agri and SME, which have seen slower growth thus far. Scope for SME growth has strengthened post-budget. Will grow the PL book at 30-35% YoY. Core corporate growth (ex of finely priced institutional book) at 11-12% YoY. Avg advances growth higher than terminal growth.

Other income: Dip in treasury income due to newer valuation norms by RBI. Feebased income is expected to strengthen. Expect Rs7-7.5bn normalized run rate on recovery from WO accounts. The reported recovery number was lower this quarter at Rs5bn due to some guaranteed account impact.

Asset quality: CE has improved vs last quarter. PL book asset quality is not a concern, as the exposure is to existing salaried customers. ECL impact is unlikely to be significant on profitability. Rs100bn of recoveries target for the year (including cash recovery, upgradations and recovery from WO accounts).

Valuation and strategy:

BOB posted ~17% CAGR in loan growth over FY22-FY24 as it deployed excess liquidity on the balance sheet. Its CD ratio, thus, increased ~600bp over the past two years to 80.3%. With intense competition for deposits, we estimate BoB’s deposit growth to remain broadly in line with the system at ~11%. We estimate advances growth to moderate to ~11.5% CAGR over FY24-FY27 led by RAM segments, thereby resulting in a slight rise in the CD ratio to 81.6%. NIM is expected to remain range-bound in the near term, while potential turn in the rate-cycle will likely drive slight contraction in margins. However, opex growth is expected to moderate after a surge in FY24, which will enable sustained improvement in cost ratios. Asset quality remains robust and we estimate continued improvement in GNPA ratio with credit cost staying well within the guided range (< 0.75%) benefitting from strong corporate balance sheets and limited unsecured exposure of the bank. BoB reported strong RoA expansion from 0.57% in FY22 to 1.17% in FY24. We estimate earnings to clock ~10% CAGR over FY24-FY27, while RoA remains steady at 1.1%. We reiterate BUY with a TP of INR 310.