Bank of Baroda's Q2FY19 results (Underperformer) - A solid quarter

Q2FY19 result highlights

• 2Q19 was a very strong quarter for BoB with strong loan growth, stable qoq margins even without any lumpy NCLT recovery, substantial decline in slippages and increase in provisioning cover. More importantly the bank has provided for IL&FS. BoB has Rs45bn exposure to IL&FS. They have provided Rs2.4bn as 20% provisioning mainly towards their exposure to the parent holding company which is at the biggest risk among all IL&FS group companies of slipping in 3Q. PAT of Rs4.2bn grew 19% yoy and declined 20% qoq. PAT of Rs4.2bn grew 19% yoy and declined 20% qoq.
• Loans grew 12% yoy and 5% qoq with strong growth in domestic loans. Domestic loans grew 21% yoy and 3% qoq driven by strong growth of 19% yoy and 6% qoq in retail loans. Within retail, housing loans grew 40% yoy and 4% qoq.
• NIM declined only 4 bps qoq, though unlike in 1Q there were not write-backs to interest income from lumpy NCLT recoveries. While domestic NIMs declined 10bps qoq overseas NIMs recovered 17 bps qoq to 1.66%.NII grew strongly at 21% yoy and 3% qoq.
• Non-interest income declined 22% yoy but grew 18% qoq. Trading gains declined sharply. Core fees grew 6% yoy and income from written off accounts grew 110%. The CEO mentioned that the bank is seeing good traction on fees from cash management and insurance distribution.
• Slippage declined from Rs47bn to Rs37bn. Fresh slippage of Rs23bn was lower than Rs29bn qoq. Additions to existing NPLs also declined to Rs14.5bn from Rs19bn. GNPAs declined by 1% qoq. Gross NPAs now account for 11.76% of loans, down from 12.46% qoq. Total stress loans including watch list now stand at 15.1% versus 15.5% qoq
• Specific provisions for NPAs declined 17% qoq on a high base of 1Q. Provisioning cover improved further to 61.8% from 59.9% qoq.  This is the highest cover among state banks we track.

Valuation and view

We expect these results to drive a short term re-rating of the stock. However we remain concerned about risks from the proposed merger with Dena / Vijaya. We believe the merger will have a negative impact on financials and operations. The CEO’s new tenor is short at one year most of which will be spent in managing the merger. We maintain Underperformer despite a very strong set of numbers. We revise TP to Rs95 from Rs85 earlier.