Stock To Buy: This Large Cap Banking Stock Zoomed 16.28% In 1 Month, Buy For Rs 197 Target Price

Stock Overview

The share price of BoB jumped 3.31% from its previous close, ending at Rs 171,75/share on NSE. It recently touched a new 52-week high on 25 November 2022 at Rs 172.70. The stock is trading 0.55% down from its 52-week high. The 52 week low is Rs 77.05, which was recorded on 27 December 2022.  

In 1 month it has given 16.28% positive returns and in the 3 months, it has given 28.7% positive returns, respectively. In 1 year it has given 96.17% positive returns. In 3 years, it has given 63.73% positive returns, however, in 5 years, it has given only 2.48% positive return on investments. 

PSBs unlike to walk down old roads on asset quality front

Public sector banks (PSBs) reported strong loan growth with CAGR of more than 17% in the previous corporate credit cycle (FY10-14). Unfortunately, this followed up with sharp jump in bad loans as GNPA ratio for PSBs shot up from mere 3.3% in FY12 to 14.6% in FY18 which was led by the corporate segment. Reckless lending together with even lenient restructuring of loans (CDR, SDR, 5/25 scheme etc.) resulted in deterioration of asset quality of PSBs which was further unearthed by the RBI's Asset Quality Review (AQR). From FY18 onwards, however, there has been marked improvement in asset quality of PSBs led by cautious growth approach and focus towards retail segments. Moreover, Insolvency and Bankruptcy Code, 2016 was also constituted and which paved the way for better recoveries together with ARC Bank of Baroda Company Information BSE Code 532134 NSE Code BANKBARODA Bloomberg Code BOB IN ISIN INE028A01039 Market Cap (Rs. Cr) 85950 Outstanding shares(Cr) 517 52-wk Hi/Lo (Rs.) 172.7/77.05 Avg. daily volume (1yr. on NSE) 33,770,740 Face Value(Rs.) 2 Book Value (Rs) 189 CMP: Rs 166 Rating: BUY Target: Rs 197 Promoters, 63.97% DIIs, 18.64% FIIs, 8.93% Others, 8.46% Share holding pattern as on September 2022 December 2022 INSIGHT 16 sale as well as partial write-offs. On account of these coordinated efforts, GNPA ratio of PSBs went down from 14.6% in FY18 to 7.4% in FY22. Decline in slippages in corporate loan book and focus towards granular loan growth improved asset quality and this change in guard is expected to keep asset quality concerns at bay.

BoB, better managed bank amongst peers (ex SBI)

Bank of Baroda (BOB) has always outperformed its peers (ex SBI) on majority of parameters and is one of the best managed PSU banks. On asset quality front, GNPA ratios of BOB spiked to 12.3% in FY18 from mere 1.5% in FY12, but have since then come down gradually to 6.6% in FY22 and further to 5.31% as of Q2FY23. BOB has one of the lowest NNPAs at 1.16% as of Q2FY23 and overall stressed book (NNPAs +restructured book) is at 3.11% as of Q2FY23, lower than peers. Slippages have come down consistently and stand at 2% vs 2.1% in Q1FY23 and 3.2% in Q2FY22. The improvement in asset quality was driven by focus towards higher rated corporate with A& Above rated loans now accounting for 82% of corporate loan book. Besides, the RBI's push for higher ageing provisions and focus towards NCLT exposures have resulted in sharp improvement in provision coverage ratios (PCR) to 70.9% in FY22 from 48.1% in FY18 for scheduled commercial banks. For PSBs, PCR improved to 69.5% in FY22 from 47.1% in FY18. BOB's PCR improved from 67.2% in FY18 to 81.8% in FY22 and further to 91.73% in Q2FY23. Excluding (Technical Write off accounts) PCR still stands tall at 79.14% as of Q2FY23. Lower NPAs, together with high PCR, infuses enough confidence now.

Further improvement in operating metrics, on the cards

System credit growth has improved off late and has recently clocked 17% for the fortnight ended November 4. Besides, the capex cycle has finally turned around and with hike in interest rates in developed economies; it makes sense to borrow at home. Thankfully, corporate have also deleveraged, unlike in the past. BOB is well placed to deliver higher loan CAGR, led by healthy growth in Retail and overseas loans. Besides, the management expects corporate and MSME loan growth to pick up from here on. For FY22, BOB delivered loan growth of 10% vs 6.6% average loan growth between FY17 &FY22. For Q2FY23, global gross advances grew by strong 19% yoy while domestic loan growth was at 15% yoy. Despite focus onretail, agriculture and MSME segments (RAM), PSB's market share have dwindled in the past decade and have only recently started to improve led by higher system credit growth. Albeit, corporate loans still account for 42% of the loan book of BOB, the mix have been granular now with housing loans accounting for 56% of retail loans. Over FY16-22, led by sharp dip in cost of funds, NIMs of PSBs have improved broadly in the range of 10-100 bps. BOB witnessed the highest improvement in NIMs to the tune of 100 bps led by decline in cost of funds while yields remained rather steady. NIMs for Q3FY23 came in strongly at 3.3% as 28% of loan book is linked to EBLR, while 53% is linked to MCLR. Moreover, CASA ratio stood firm at 42.8%. While PSBs have been relatively less efficient, BOB has held on to cost to income ratio of ~50%. Albeit, treasury income will not be supportive, fee income will be led by higher credit growth ahead. Hence, with improvement in credit-deposit (CD) ratio, and higher share of loans linked to external benchmarks and sticky CASA, NIMs are expected to improve for BOB while steady cost to income and muted credit costs will support profitability ahead. BOB has already reported ROA at 0.84% for H1FY23 vs 0.6% in FY22.

Valuation

Revival in corporate capex cycle is one of the biggest triggers for higher credit growth, which will be supportive for the PSBs and that have been reflected in recent market share gains in advances. Besides, given the stricter norms and regulations in place, PSBs are unlikely to commit mistakes done in previous corporate credit cycle. PSBs have cleansed their balance sheets and are ready to lend ahead. Besides, they have also reduced their exposure to low rated corporate and focused on other segments, thus bringing the much-needed granularity. BOB is one the best performing PSB and has outperformed peers in majority of parameters. With improvement in CD ratio, higher share of loans linked to external benchmarks and sticky CASA, NIMs are expected to improve for BOB while steady cost to income and muted credit costs will support profitability ahead. At the CMP, the scrip trades at P/BV of 0.8x FY24E book value and investors are advised to 'BUY' for a target of Rs 197.

Disclaimer

The stock has been picked from the brokerage report of Ashika Stock Broking. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.