BoB: No more merger-led constraints, power of three becoming more evident

Post results, analysts have raised Bank of Baroda's FY22 estimated price to book to 0.5x from 0.3x. This is the first valuation upgrade in nine years

Bank of Baroda’s December quarter (Q3) results surprised the Street on many counts. Its gross bad loan ratio, without the apex court’s stay on asset classification, at 9.4 per cent and loan growth at 6 per cent year-on-year (YoY) moved the needle favourably. Analysts have raised their FY22 earnings estimates by 12-22 per cent after the results.

The bank posting net profit of Rs 1,061 crore, as against a loss the year-ago quarter, was also positive. With this, it’s evident that much of the merger-led constraints are behind the bank, and benefits of the merger with Vijaya Bank and Dena Bank initiated in September 2018 are likely to materialise soon.

An interesting part, which reiterates the point, is Q3’s gross non-performing assets (NPA) came at 8.5 per cent, lower by 195 basis points YoY. Even on a proforma basis, gross NPA ratio at 9.4 per cent fared better than 10.4 per cent a year ago. The net NPA ratio at 2.4 per cent (with the SC’s dispensation) and 3.4 per cent (without the dispensation) also indicates that the post-consolidation cleaning up is pretty done. 

Analysts at Kotak Institutional Equities say the pandemic’s impact on the book is far less than initially anticipated by the market. Less than 2 per cent of the book is expected to be restructured by March 2021.

However, as these NPA levels are far above private banks’ threshold (gross NPAs without SC dispensation between 1.4 – 5.3 per cent), Bank of Baroda’s asset quality warrants monitoring and confidence on this aspect will play a major role for potential investors as it gears up for its Rs 2,000-4,000 crore equity raise in the coming months.

What’s interesting and reasonably resembles the acceptable levels seen in private banks is the growing share of well-rated corporates in Bank of Baroda’s books and the favourable dispersion of assets. For instance, from 52 per cent share of AA and above book (well-rated corporates), the level rose to 60 per cent in Q3. However, the quantum of unrated book at 16 per cent, up from 11 per cent in FY20, can swing the asset quality either way.

Likewise, the bank’s retail growth coming from home and cars loans (both growing over 10 per cent) yields strength to its retail penetration at 49 per cent of total book; analysts at Nomura have raised their loan growth estimates by 1-5 percentage points to 11-15 per cent for FY21-23 to factor in Q3’s better-than-expected growth.

After Q3 results, analysts have raised Bank of Baroda’s FY22 estimated price-to-book to 0.5x from 0.3x. This is the first valuation upgrade in 9 years. If the bank manages to raise capital at these levels or higher, it may not be very adverse for investors. But that’s the test ahead for Bank of Baroda.