Buy Bank of Baroda; target of Rs 210: Edelweiss

Edelweiss' research report on Bank of Baroda

We met Bank of Baroda’s (BoB) management to gauge bank’s performance on critical parameters. a) The management sounded confident in managing credit cost in FY18 at a level below FY17 due to adequate provisioning coverage they hold – covered slightly above 50% on exposure to 10 accounts they have which are considered for IBC forming 18% of GNPLs; also though top 50 exposures form 40% of GNPLs, its covered to the extent of 53%. b) After trailing industry average growth for past many quarter being in consolidation phase, now with internal restructuring and focus it should get back to industry average credit growth. This further supported by improved NIMs (CD ratio, lower deposit rates, better international NIMs) will support revenue growth traction. Given earnings growth visibility and attractive valuation of 0.9x FY19 P/BV, we maintain ‘BUY’. However, key risk to our call will be consolidation in PSU banking space (given uncertainty, execution risk, pricing etc) which might adversely impact fundamentally strong leading bank like BOB.

Outlook

Gradually earnings visibility for the bank is improving. Even after factoring higher credit cost, improving NIMs and growth will help it report RoEs upwards of 10% by FY19E. Though bank is well placed on capital, they have taken approval of INR60bn capital raising - while it could be a growth capital, we may not rule out possibility of inorganic growth. Considering valuation of 0.9x FY19E P/BV (even factoring in higher stress) and strong capital position, we maintain ‘BUY/SP’ with TP of INR210. Key risk: Consolidation amongst PSU banks.