Buy Bank of Baroda; target of Rs 186: Geojit BNP Paribas

Geojit BNP Paribas's research report on Bank of Baroda

BOB continued to consolidate balance sheet with selective lending and greater thrust on profitable customers. Hence, the bank’s global loan book declined by 14.6% YoY. Overseas loan book declined by 21.6% YoY as it ran down buyers’ credit worth Rs5000cr and replaced it with a better yielding local credit worth Rs 1000cr. Domestic loan book also de-grew by 11.2% YoY partially due to reclassification of some of the DISCOM loans from advances book to investments book. Going forward, we expect advances to grow at a sluggish pace of 3.6% CAGR over FY16-18E as the bank continues to focus on re-balancing the assets and liabilities and reshuffling of portfolio skewed towards higher yielding assets.

While H1FY17 witnessed consolidation, lower delinquency, improving margin and higher coverage ratio were the key positives. Though we expect consolidation in loan book to continue for the next couple of quarters, we continue to like the bank owing to its strong capital position, able management and improving return ratios. However, the benefits from consolidation will gradually accrue over next 2-3 years. As a result, we expect the bank to report RoA of 0.5% and RoE of 7.6% by FY18E. Besides, recognition of most of the stressed accounts as NPA leaves minimal asset quality overhang for the future. Hence, we continue to maintain BUY rating with a revised upwards TP of Rs186 valuing the bank at P/ABV of 1.5x for FY18E. (Previous TP: Rs165).