Bank of Baroda - Stress Creation Raises its Head, Outlook Cautious ::Edelweiss

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Bank of Baroda’s (BoB) Q3FY15 PAT plunged to INR3.3bn, much lower than our expectations, largely on elevated asset quality stress and one-off tax related item (taking tax rate to ~70%). Key highlights were: 1) asset quality was major disappointment with slippages touching INR30bn (highest since FY10), which along with elevated restructuring (INR16bn) led to sizeable incremental stress (INR46bn); and 2) core operating performance was muted (flat YoY/down QoQ) – a derivative of tepid revenue momentum (NIMs declined 10bps QoQ) and elevated operating expenses. In view of higher asset quality stress and one-off tax expense, we prune our FY15/FY16 estimates by 24%/12%. Given management expectation of continued stress along with slower growth will likely delay RoE improvement. In addition to this, top management vaccum and adequate valuations of 1.0x FY17 P/ABV keeps us guarded.

Asset quality stress makes its presence felt

Defying macro challenges, BoB has been reporting superior asset quality, owing to which its Q3FY15 performance came as a major disappointment. Slippages surged to INR30bn (3 lumpy accounts contributed INR10bn). This, along with modest recoveries/upgrades at INR3.8bn (versus INR6bn run rate over past few quarters) pushed GNPLs to INR154bn, up 18% QoQ. Restructuring was also high at INR16bn, taking total outstanding stress pool (GNPLs plus restructured book) to 9.72% -  elevated but lower than peers. Management expects stress to continue for couple of more quarters before stabilising, which keeps us vigilant.

Core profitability muted

Core operating performance also disappointed (flat YoY/down QoQ) following tepid revenue momentum (global NIMs declined 20bps QoQ) and slower loan traction. This, along with high opex (higher other expense due to one-off) kept core operating performance muted. The bank has not yet made provisions for increased mortality table, which could further exert pressure on profitability, keeping us guarded.

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https://www.edelweiss.in/research/Bank-of-Baroda--Stress-Creation-Raises-its-Head,-Outlook-Cautious;-Result-Update-Q3FY15/28193.html