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Analysts cut target price of SBI, Bank of Baroda after dismal Q1 results, higher NPAs

Bank of Baroda's total stressed assets increased from 10.8 percent to 11.7 percent sequentially. Net interest income was up 1 percent YoY and profit tanked 52 percent to Rs 203.4 crore in Q1.

August 14, 2017 / 10:40 AM IST
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PSU banking majors State Bank of India and Bank of Baroda extended losses in morning on Monday, falling up to 2 percent as brokerage houses slashed target price after disappointing earnings and bad asset quality performance in April-June quarter.

"SBI surprised negatively on asset quality in Q1 while loan growth was much weaker than expected. We expect return on equity to remain muted for the rest of FY18 in line with other corporate banks, turning the corner only in FY19," Jefferies said while retaining buy rating on the stock but lower target price to Rs 325 (from Rs 355 earlier).

The research house has cut its earnings estimates sharply on lower growth expectations, resulting in weaker growth in NII and fee income and consequently higher expense ratio.

For the merged bank, it has increased credit cost assumption in FY18. The weakness is somewhat moderated owing to the savings rate cut announced by the bank resulting in marginal net interest margin expansion, Jefferies said while estimating FY17-20 adjusted book value CAGR of 19 percent (consolidated basis) and 18 percent (standalone).

However, in view of elevated provisioning pressure, Motilal Oswal also cut its FY18 earnings estimates by 37 percent and recommended buy rating with reduced target price at Rs 341 (from Rs 375 earlier).


According to the research house, the larger part of asset quality clean-up is behind.

CLSA also reduced its target price to Rs 350 from Rs 360 following cut in earnings estimates but it has maintained buy rating, saying asset quality disappointed but better than PSU banks and the key disappointment was high non-performing loans reflecting stress in corporate, retail & agri loans.

SBI's total consolidated stressed assets were 9.94 percent of net advances. Both the gross and net NPA ratios saw a spike, being 9.89 percent & 5.91 percent versus 9.06 percent & 5.15 percent QoQ respectively. Net profit on standalone basis fell 20 percent and net interest income was down 3.5 percent YoY, led by weaker NIM of 2.36 percent versus 2.84 percent & flat loan growth of 0.5 percent YoY.

The deterioration in asset quality was largely due to associate banks that merged with SBI in April. The merged entity (SBI) has slippages of Rs 30,059 crore; assuming solo SBI maintained its run-rate of Rs 10,000 crore of slippages a quarter, the subsidiaries must have generated a fresh bout of slippages of Rs 20,000 crore.

Jefferies reduced target price for Bank of Baroda to Rs 155 (from Rs 180 earlier), saying risk of chunky slippages leading to lower net interest margins and higher credit costs continues to remain for the next few quarters.

"While management continued to highlight improvement in inherent processes and sharper business focus, confidence of translation of these efforts to higher return ratios in the near future remains low, with our estimates suggesting an return on equity of around 14 percent only by FY20," it said while retaining hold call on the stock.

According to Jefferies, downside risks are asset quality deterioration, NIM compression and growth slowdown while upside risks is pre-provisioning operating profit trajectory improvement.

Motilal Oswal also slashed target price to Rs 198 (from Rs 217 earlier) while maintaining buy call on the stock.

The research house expects stress addition and credit costs to moderate from FY19, and cut FY18/FY19 earnings by 48/8 percent to account for lower margins and high credit costs.

Near-term earnings volatility is likely to continue due to asset quality-related stress, it feels. Additional buffers like non-core financial investments among other options will lead to dilution-free growth in the near term, it said.

Bank of Baroda's total stressed assets increased from 10.8 percent to 11.7 percent sequentially. Net interest income was up 1 percent YoY and profit tanked 52 percent to Rs 203.4 crore in Q1.

At 10:36 hours IST, Bank Of Baroda was quoting at Rs 141.40, down 0.81 percent and State Bank of India was at Rs 278.50, down 0.77 percent on the BSE, on top of 3.91 percent and 5.4 percent loss on last Friday, respectively.
first published: Aug 14, 2017 10:40 am

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