Bank of Baroda's Q3FY20 results (Downgrade to Underperformer) - Asset quality deterioration continues

Q3FY20 result highlights

• BoB reported a PBT loss of Rs22bn and net loss of Rs14.1bn versus PAT of Rs4.4bn yoy and Rs7.4bn qoq. The consensus estimate for PAT was Rs6.8bn for 3Q. The loss was mainly on account of a sharp increase in credit cost and partly on account of weak loan growth.
• Slippage of Rs118bn is uncomfortably high compared to Rs72.6bn qoq and expectation of 68bn. Breakdown of slippage in exhibit 2. Slippage ratio rose from an already high 4.7% to 7.4% qoq. Total corporate slippage was 84bn (36bn in 2Q). 85% of the domestic corporate slippage was from the watchlist. Slippage from RBI divergence was Rs45bn. Mgmt explained that most of the divergence related slippage and provisioning were on account of deterioration in the value of collateral and also interpretation issues. Agri/retail/MSME slippage declined qoq. While slippage rose sharply by 63% qoq, recoveries also improved qoq resulting in a net increase of 5% qoq in GNPAs. Total stress loans remain high at 11.9%.
• Despite huge slippage of Rs43bn from the watch list, the watch list remains large at Rs105bn or 1.6% of loans. The key sectors in the watch list are power, textiles and EPC. Most of the textile stress is from MSMEs. The key account in the power sector is RKM Powergen.
• Out of 43,000 MSME account eligible for restructuring, bank has restructured 33,000 account amounting to Rs 13bn
• Loans growth remained subdued at 3% yoy /3% qoq. Retail loans grew 15% yoy with home loans growing 10% while auto loans grew 43%. Corporate loans declined 2% yoy while SME loans declined 5% yoy. NIM remained flat qoq at 2.8%. NII grew 9% yoy and 1% qoQ.
• Core fees grew 10% yoy while total non-interest income grew much faster at 29% yoy led by recovery income and trading gains. Opex grew 20% yoy and 9% qoq. CI ratio deteriorated from 46% to 49.8% qoq.
• Core PPOP grew 6% yoy but declined 1% qoq.
• Credit cost rose sharply by 93% qoq to 4.1% in 3Q from 2.2% in 2Q. PCR declined marginally from 64.4% to 63.8% qoq.

Valuation and view

We remain concerned about the bank’s sticky watch list and high level of corporate slippage. In addition, the bank’s top two standard private NBFC exposures remain big at US$1.1bn. Given headwinds in the NBFC sector along with inquiries and litigation, we see higher risks to the bank’s concentrated exposures to a few private NBFCs. Also, integration issues have resulted in a slowdown in the consolidated entity’s growth. Joining of a new CEO (from SBI) is a positive. His strategy to bring back growth in the bank will be closely monitored. We cut our earnings as we build in higher credit cost and slower loan growth. We downgrade our recommendation to Underperformer given significant deterioration in asset quality and cut TP to Rs80 (0.5x PBV FY21E).