Event update: Bank of Baroda (Downgrade to Underperformer) - MD&CEO gets only one-year extension

The MD&CEO of BoB has been given a one-year extension by the government. This is lower than expected. The market was expecting him to get at least a 2-year extension. We believe a substantial portion of his extended tenor will go in monitoring the three-way merger. This is negative as it raises uncertainty on leadership and business prospects of the merged BoB (the merger of BoB, Dena and Vijaya is expected to be completed in 6-9 months).

Most of Mr Jayakumar’s new term will be spent on overseeing the merger. After his exit next year, the business restructuring initiated by him, which has just started paying off, could lose momentum and is a key risk for the stock. Mr Jayakumar’s strategy of increasing retail loans, CASA and restructuring overseas operations had just started paying off.

Three back to back negatives: Since August there has been negative news flow on the stock. In August, defaults by IL&FS led to a sharp correction in BoB’s stock price because BoB’s exposure to IL&FS is the highest among banks we cover at Rs45bn. In September, BoB announced plans of a 3-way merger of BoB, Dena and Vijaya which was received negatively because Dena is amongst the weakest state banks. And today a less-than-expected renewal term for Jayakumar is another negative.

Capital raising and RoE recovery will be a challenge: With these back-to-back negative events, capital raising will be a challenge for BoB. BoB’s CEO had guided at the previous analyst meet that the bank will achieve an RoE in the early teens by FY20E. Because of the Dena merger, that RoE recovery was in any case pushed ahead as FY19/ FY20 would be loaded with merger related provisions and expenses. Wll be a challengith uncertainty around leadership, there is little visibility of a double digit RoE even in FY21/22E.

Downgrade to Underperformer: With low visibility of a double digit RoE in the medium term, we cut our target multiple sharply to 0.5x FY20E from 0.7x. Our new TP is Rs85. We downgrade the stock to Underperform. We will review our earnings once we get a better sense of merger related provisioning. The near term upside risk to our TP would be from 2Q earnings which we expect to be strong.