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MOSL: BANK OF BARODA (Buy)-Earnings in line- Asset quality to recover only gradually

BANK OF BARODA: Earnings in line; Asset quality to recover only gradually

(BOB IN, Mkt Cap USD6.1b, CMP INR110, TP INR145, 32% Upside, Buy)

•  by lower provisions and treasury gains of INR3.4b (+124% YoY).
• NII increased 3% YoY to INR64.9b (4.3% QoQ decline) affected by slower domestic loan growth. Global NIMs declined 13bp QoQ to 2.62% while domestic NIMs declined 5bp QoQ to 2.73% from 2.78% (adj. for one-off IT refund) in 4QFY19.
• Domestic loan growth stood at 5.2% YoY (3.6% QoQ decline) to INR5.3t. However, retail loan growth remains robust and grew at 20.5%. Within retail, home/auto loan growth was 17%/32% YoY, whereas MSME loans declined 4.6% YoY. Total deposits grew 6.4% YoY to INR8.9t, taking the domestic CD ratio to 68%. Domestic CASA declined 3% QoQ, thus CASA ratio declined 71bp QoQ to 36.5%.
• Fresh slippages stood elevated at INR55.8b; of this, INR4.4b was due to the IL&FS group, leading to an annualized slippage ratio of 3.8%. Around 70% of the slippages came in from the watch-list of FY19. The GNPA/NNPA ratio increased 26bp/30bp QoQ to 10.28%/3.95%. PCR including technical write-offs stood at 77.3%.
• Other highlights: (1) O/s watch-list stood at INR165b while the non-funded exposure to watch-list is INR23b. (2) CET-I/Tier-I stood at ~8.5%/9.6%. (3) SMA-2 increased to 1.48% v/s 1.39% in FY19 while SMA-1 declined to 2.12% v/s 2.25% in FY19. (4) Exposure towards PTC is INR19b, ILFS is INR28b, DHFL is INR19.6b, Sintex is INR8.5b and ADAG group is INR17.5b.
• Valuation and view: Post merger, BOB has reported modest 1Q results reflecting tepid loan growth and slight moderation in margins. We expect fresh slippages to be slightly elevated in FY20 (2.7%) driven by the merged entity's exposure to various stressed groups and uncertain macros, before moderating in FY21. The clarity on management succession is critical as the term of the current CEO gets over in Oct'19. We estimate credit cost to remain elevated at 2.0%/1.4% in FY20/FY21. Thus, we expect the merged entity to deliver 0.7%/12.0% ROA/ROE for FY21. We maintain our target price at INR145 (1.0x FY21E ABV) and BUY rating on the stock.