Bank of Baroda's Q4FY19 results (Upgrade to Neutral) - Worst is over, even on the merger

Q4FY19 result highlights

• BoB reported a loss of Rs9.9bn versus PAT of Rs4.7bn qoq and loss of Rs31bn yoy. While PPOP was strong and in line, provisions were much higher than expected due to ageing and accelerated provisions on Videocon/Aircel/RCom. Core PPOP grew strongly at 38% yoy and 9% qoq.
• Domestic loans grew 13% yoy while total loans grew 9% yoy pulled down by declining buyers’ credit. Within domestic loans, retail loans grew strongly at 24% yoy and 6% qoq.
• NIM improved substantially by 31bp qoq to 2.9% driven by an improvement in domestic NIM. NII grew 17% yoy.
• Slippage remained flat qoq at Rs37bn. GNPAs declined 9% qoq to 9.6%. There was a sharp increase in loan provisions that grew 62% sequentially. This has led to a strengthening of provisioning cover ex write-offs to 67% from 64% qoq. BoB has exposure of Rs20bn to Reliance Commercial, Rs 40bn to DHFL and a small exposure to Religare. In addition to loan exposure of Rs40bn to DHFL, it has exposure of Rs60bn to PTCs of Dewan. The loan exposure of Rs40bn to DHFL is the combined exposure of BoB/Dena/Vjaya. BoB has converted Rs10bn of loan exposure to Dewan to PTCs last month and wants to do more.
• Fees were soft declining 1% yoy while total other income grew strongly at 16% yoy and 22% qoq led by higher trading gains and recovery income. Opex grew 5% yoy.
• While results of Dena and Vijaya are not out, BoB indicated that both these banks will individually align their bad loan recognition and provisioning to BoB’s which means that most of the merger related provisioning pain will be done with in 4Q itself. Consolidated results will be published shortly
• CET-1 is 10.5% and includes capital infusion of Rs50bn. BoB plans to raise fresh equity of Rs119bn in FY20.

Valuation and view

With aggressive provisioning at BoB and also at Dena and Vijaya, we believe merger related catch up provisions are done.  We expect credit cost and slippage to reduce materially for the merged entity. The current CEO’s term ends in October 2019 which is a key risk because he has been responsible for revamping the bank’s strategy by focussing on retail lending, branding and fintech. Also strong leadership will be required to ensure that the merged entity progresses well. We believe the current CEO’s continuity is crucial to ensure a smooth transition post-merger. We still do not know if he will seek an extension. We revise TP to Rs135 based on 0.75x PBV FY21 versus 0.6x earlier. We upgrade the stock to Neutral as merger risks recede.