Bank of Baroda's Q4FY18 results (Outperformer) - A mixed quarter; Guidance remains bullish

• BoB posted loss of Rs31bn against PAT of Rs1bn qoq and Rs1.5bn yoy. Operating performance was mixed. On the positive side, domestic loan growth and CASA growth were strong driven by retail, the bank had zero g-sec MTM and fees remained strong. On the negative side, the bank has deferred gratuity expense of Rs3bn, NCLT provisions of Rs5bn and had a one-time increase in NII of Rs2.5bn due to re-allocation of recovery income. Also, the residual watch list of Rs100-120bn is on the higher side given that BoB always had a granular portfolio.
• Slippages of R126bn rose sharply from 56bn qoq driven by RBI’s circular. 34% (Rs43bn) of slippage was from the watch list while total corporate slippage was Rs89bn. Corporate slippage outside the watch list was from Aircel (20bn) and Gitanjali (Rs4bn). GNPAs rose 17% qoq to 12.9%. Total stress loans stand at 16.1% versus 16.9% qoq
• The bank has guided to a residual stress pool of Rs100bn including residual SDR, SMA2 and stressed SMA1. Loans under 5:25 of Rs28bn are not part of the watch list.
• Gross loan growth remained strong at 13% yoy and 8% qoq with home loans leading at 48% yoy and 17% qoq, overall retail growing 42% yoy and 21% qoq and corporates growing 17% yoy and 13% qoq.
• NII adjusted for one-offs grew 9% yoy but declined 6% qoq. Reported NIM at 2.51% was lower than 2.72% qoq but higher than 2.31% yoy. Adjusted NIM comparable to last year was lower at 2.35% in 4Q18 versus 2.38% qoq and 1.9% yoy.
• Other income grew 1% yoy but declined 14% qoq due to lower trading gains. Core fees grew strongly at 17% yoy and 31% qoq with increased traction on recoveries and third party distribution.  Opex rose sharply by 19% yoy and 24% qoq due to change in depreciation policy. Adjusted for the change, C/I would have been lower at 47% versus the reported 53%. Credit cost rose sharply to 7% from 3% qoq. The bank follows a conservative policy of provisioning for retail loans and non-fund exposures. Provisioning cover ex TWO stands at 58%.

Valuation and view: Mgmt guided to loan growth of 15%, stable NIMs, slippage of 100bn and credit cost of 90bp for FY19.  We have been more conservative in our estimates for loan losses. We cut earnings and TP. Maintain OP given better CAR and profitability compared to other state banks and lower risks on loans and bonds.