Asset quality outlook remains key risk to watch out for.
Bank of Baroda (BoB) reported Q3FY21 PAT of Rs 10.6 bn, missing our estimate due to higher provisioning. While business momentum was on improving trajectory, asset performance remains unpredictable. We expect higher slippages/credit cost in Q4FY21/H1FY22 with the performance of restructured MSME pool remaining critical.
Recovery seems to be tracking our bull case scenario; juxtaposing this with deferred recognition, we revise up FY21/ FY22/FY23e book value 3%/5%/7%. We maintain our target multiple at 0.5x, which coupled with rollover to June 2022e, yields revised TP of Rs 88 (earlier Rs 75). Maintain Buy. Asset quality outlook remains key risk to watch out for.
Lumpy slippages continue: As domestic slippage recognition was on a standstill during the quarter, all slippages (at Rs 39.9 bn) were from the international book. Pro-forma slippages jumped to Rs 86.3 bn. Collection efficiency has been improving and came in at 93% for the overall book. Repayments trajectory will remain critical.
Earnings steady; sustenance vital: BoB reported steady build-up in advances due to pick up in gold loans, MSME loans and auto loans. This, coupled with steady NIM, led to 13% y-o-y growth in operating profit. Armed with a strong franchise and slackened competition, the bank aspires for an ambitious build-out. However, we need more evidence of sustained execution and successful integration, before conviction truly sets in.
Outlook: Valuation comfort— Demonstration of the merger value add and, indeed, getting through the current crisis without deep earnings erosion are key. Valuation at 0.4x FY22e P/BV lends some comfort. Hence, we maintain ‘BUY/SN’.