Bank of Baroda's Q1FY20 results (Neutral) - Consolidation erodes profitability

Q1FY20 result highlights

• BoB (consolidated for Dena and Vijaya) reported PAT of Rs7.1bn in 1Q20 versus loss in 1Q19 and 4Q19. There were fears of a big bad debt provision on Vijaya and Dena loans which did not happen. Rather bad loan provisions declined substantially. Credit cost declined from 8% to 2% qoq. The performance of the consolidated entity was weaker than standalone on all key operating parameters.
• Consolidated domestic loans grew 5% yoy, a deceleration over 13% for standalone in 4Q. Retail loan growth remained strong at 20%. Total loans grew 6% yoy.
• NIM fell to 2.62% from 2.75% qoq. Consolidated NIMs are lower than BoB’s standalone NIM of 2.9% in 4Q due to high cost of deposits of Vijaya Bank. NII growth moderated to 2.6% yoy.
• Total slippage was 66bn versus 73bn qoq. Credit cost fell sharply to 2% from 8% qoq. The largest account that slipped was Barwa Adda Expressway, a road project of IL&FS. Around 55% of total slippage was agri+retail+SME while 45% was corporate. GNPAs remained flat qoq despite a decline in slippage as recoveries were weak. The GNPA ratio increased 26bps qoq to 10.26%. PCR declined from 66% to 64%. Watch list for the merged entity is Rs160 bn versus 100bn for the standalone entity. Key accounts in the watch list include ADAG-Rs17bn, DHFL-Rs19.8bn, Sintex – Rs8bn, Suzlon – Rs10bn. BoB’s standalone watch list was 105bn in 4Q. While Rs28n slipped into NPLs, an equal amount was added, leaving the stand-alone watch list at the same level in 1Q20.
• Cost to income declined qoq to 49% from 66% but remains higher than the standalone figure of 45%.
• The consolidated loss in 4Q19 (previous quarter) was Rs88bn. While standalone BoB reported loss of 9.9bn, the loss of Rs78bn for Dena+Vijaya was on account of heavy provisioning to align bad debt provisioning, wage and pension policies of the two banks to BoB’s. This big loss which flowed through into opening reserves of the merged entity has lowered the CETI of the consolidated firm to 8.5% versus 10.38% for standalone BoB in 4Q. The loss of Rs78bn for Dena+Vijaya includes: Rs20bn for pension, Rs10bn for the new wage agreement, Rs10bn for taxation and the remaining 40bn for aligning NPL provisions. It may be noted that there was no adjustment made directly through reserves. Every entry was taken through the income statement.

Valuation and view

While merger has eroded profitability, we believe the negatives of the merger are priced in. We maintain Neutral as we believe profitability will remain weak but valuation offers downside comfort. BoB will raise capital of Rs45-60bn through AT1 bonds and ESOPs. We believe the current CEO’s continuity is crucial to ensure a smooth transition post-merger.