Why Bank of Baroda is among preferred PSBs

Tab on slippages and strengthening retail business place it ahead of peers

Bank of Baroda (BoB) is among the few public sector banks (PSBs) which are better placed to reclaim the lost investor faith. According to a Bloomberg analyst poll, the stock enjoys better investor preference today than six months ago.

Reasons such as its ability to walk its talk on containing bad loan formation, steady efforts to boost its retail operations and renew its focus on overall lending have been favourable. Thus, analysts believe the bank might achieve its FY18 targets and have readjusted their earnings estimates.

Analysts at Nomura have raised their net profit estimate for FY18 and FY19 by one to three per cent, driven by better than expected growth in FY17. Those at Deutsche Bank have raised it by two per cent and the target price by 10 per cent, to ~220.

“Among all PSU banks, BoB is better positioned with an improving net interest margins, strong current account–savings account accretion, growth traction picking up and higher comfort on asset quality. Slippages and credit costs are likely to decline and a higher coverage ratio offers comfort, resulting in better core profitability in FY18. We expect a return on equity of 8–11 per cent in FY18-19,” analysts at Deutsche Bank said.

Efforts to diversify its loan book also offer comfort. The share of agricultural loans (mostly backed by gold as security) and retail loans account for 35 per cent of BoB’s total loan book. The two loan accounts have demonstrated growth of 14 per cent and 28 per cent, respectively, year-on-year in FY17. Even the corporate book is diversified, with no segment accounting for more than five per cent.

BoB does not have a lofty share of exposure in troubled sectors such roads, power, telecommunications and iron & steel. Each of these accounts for one to five per cent of the loan book.

With the top 50 accounts being adequately provided for (51 per cent), incremental stress might be limited. In FY18, BoB plans to increase its provision coverage ratio to 70 per cent, which if executed could be the best among PSU banks. “We believe recoveries should help reduce credit costs in FY18 and FY19 and push return on equity to double digits, in line with the management’s forecast, while a favourable valuation could lead to a further re-rating of the stock in the next 12-18 months,” analysts at Daiwa Securities said.

However, it could be foolhardy to believe all asset quality issues are behind. For instance, as the Reserve Bank of India nudges banks for higher provisions on loan accounts referred to the National Company Law Tribunal for resolution, this could result in higher-thanestimated loan loss provisioning in FY18. This risk is not fully priced in. Also, with capital being deployed towards growth and provisioning, BoB might have to raise fresh capital from secondary issuances, which could dilute valuations.