Bank of Baroda's Q1FY18 results (Neutral) - Lower than expected

Q1FY18 result highlights

• BoB’s PAT of Rs2bn was lower than our estimate of Rs2.8bn. The result was below expectation with pressure on loan growth, lower NIMs and higher than expected slippage. Slippage of Rs52bn was higher than Rs41bn qoq. NIM declined 5 bps qoq. Excluding trading gains, the bank would have reported a loss of 2.7bn at the pre-tax level.
• Of the total slippage of Rs52bn, corporate slippage was Rs19bn, dispensation related slippage was Rs5.5bn, agri slippage was Rs6bn and retail was Rs4bn. The two large corporate accounts that slipped were Videocon for Rs12bn and Gammon for Rs6bn. SDR during the quarter amounted to Rs17.4bn of which Rs16.4bn was RCOM. GNPAs rose 8% qoq as recoveries+upgrades declined to Rs16bn from Rs23bn, write-offs were lower and slippages rose. Gross NPAs account for 11.4% of loans versus 10.5% qoq, while total stress loans stand at 17.5% assuming 50% of SMA2 loans are restructured. There has been a sharp increase in non-overlapping SMA2 loans to Rs92bn from Rs30bn qoq. Total stress loans including 5:25, SDR, S4A, SMA2, restructured loans and security receipts is uncomfortably high at 18.7%. CET-1 stood at 8.83% and as of now there are no plans to raise fresh equity in fiscal 2018.
• Loans grew 4% yoy but declined 1% qoq. While the 4% yoy loan growth looks better than SBI/PNB, it has come on a low base which is a concern. Retail growth was strong and impressive at 19% yoy / 5% qoq led by strong growth in housing at 27% yoy and 9% qoq. Overseas loans declined 6% yoy. NIM declined 11 bps yoy and 5 bps qoq on a low base. NII grew 1% yoy.
• Core non-interest income grew 12% yoy. Credit cost was lower qoq at 2.3% versus 2.6%. Management is evaluating the pro and cons of taking over a smaller bank. The probability of some announcement by March 2018 is high in our view. Going by the SBI experience, the benefit of any merger between state owned banks is long drawn while the upfront costs are high.

Valuation and view

We are cutting our earnings and reducing our TP to Rs145. While BoB’s provisioning cover is higher than other banks and slippages are lower, the bank’s weak profitability and a high level of total stress loans are key negatives. If the bank decides to take over a smaller state bank, short term profitability will likely come under more pressure. Maintain Neutral.