Bank of Baroda's Q3FY18 results (Upgrade to Outperformer) - Strong operating performance. Outshines peers

Q3FY18 result highlights

• BoB’s PAT of Rs1.12bn declined 56% yoy and 69% qoq and was below our estimate of Rs1.7bn. The miss was on account of higher than expected loan provisions. Slippages were higher than expected at Rs56bn versus Rs35bn qoq. While PAT was lower than expected, operating profit was much stronger than expected driven by expansion in core NIMs and strong treasury income. Evern after adjusting for all one-offs, core operating profit has grown at a strong 47% yoy and 18% qoq.
• Slippages rose qoq from Rs35bn to Rs56bn. Higher ageing provisions on some existing NPLs where management saw higher expected losses and the bank’s policy of writing off bad auto loans if repossession does not happen in 6 months and bad home loans after 2 years of being referred to SARFAESI led to a sharp rise in provisions. Provisioning cover ex technical write offs rose to 59% from 57% qoq and is amongst the highest in state owned banks.
• Loan growth remained strong at 14% yoy and 3% qoq with home loans leading at 44% yoy and 9% qoq, overall retail growing 33% yoy and 6% qoq and corporates growing 14% yoy and 6% qoq. The bank is gaining market share from other state banks that are under PCA.
• NII grew 40% yoy and 18% qoq. The bank booked interest on tax refund of Rs3.3bn in 3Q. Also from FY18 any recovery in NPLs first goes towards adjusting overdue interest which has resulted in interest income of Rs2.2bn in 3Q and Rs2bn in 2Q18 against zero last year. Adjusting for one-offs NII growth remains strong at 23% yoy and 9% qoq. Adjusted NIM stood at 2.38% in 3Q18 versus 2.18% in 2Q18 and 2.06% in 3Q17. Reported NIMs were higher at 2.72% in 3Q and 2.31% in 2Q18.
• Excellent treasury management was also a key positive with the decline in trading gains from Rs6.5bn to Rs5.1bn qoq being much lower than other banks. MTM loss was small at Rs1.7bn in 3Q and more importantly it related to non g-secs mainly equity associated with stress loans. G-sec MTM was zero.

Valuation and view

We raise TP to Rs190 (1xPBV FY20E) and upgrade the stock to Outperformer. BoB’s profitability will continue to be better than other state banks in the next two years. BoB stands out among peers for the strong beat on opertating profit and excellent treasury operations. The current CEO’s strategy which focussed on offering a complete product suite, strengtheing lending practices, focus on digitzing the business, competitive pricing in home loans to gain share, is now paying off and showing in numbers since 2Q18. The key risk to our earnings is if the current CEO does not continue at the bank after his term expires in October 2018. He is eligible for re-appointment. As of now there is no official communication about this.