Bank of Baroda shares: This PSU bank can rally 60% in 6-12 months despite Q4 loss, says CLSA

NEW DELHI: Unlike , Bank of Baroda (BoB) is a cyclical recovery trade with strong return potential over the next 6-12 months, said CLSA. The foreign brokerage, though, prefers SBI, , and in the bank pack.

CLSA said the corporate credit cycle is turning, and there is adequate capitalisation in BoB following the recent capital raise (CET-1 at 11 per cent). Besides, the bank showed strong retail asset quality in a pandemic year, it said.

Calling SBI a structural story, BoB’s current valuation at 0.55 times FY23 book value is undemanding, it said, while increasing its estimated earnings by 4-5 per cent and target price to Rs 130 from Rs 125.

At 2 pm, the scrip traded 4 per cent lower at Rs 80 on BSE.

CLSA said its new target price Rs 130 (55 per cent upside) is based on a 0.77 times FY23 P/B. The valuation assumed for BoB is lower than the last cycle due to lower RORWAs this time than the last cycle, it said.

RORWA stands for return on risk-weighted assets.

For March quarter, Bank of Baroda reported a net loss of Rs 1,047 crore. The bottom line was partly impacted by a sharp rise in tax expense to Rs 3,726 crore as against a tax writeback of Rs 2,230 crore in the year-ago quarter.

The bank’s provisions for bad loans rose 44 per cent on-year during the quarter to Rs 4,593 crore. At the same time, the lender’s gross non-performing assets ratio stood at 8.87 as against 8.48 a quarter ago on a reported basis.

CLSA said Bank of Baroda’s March quarter results surprised it positively with less than 50 basis points of slippage and strong adjusted net interest income (NII) performance.

“Retail slippage in FY21 of less than 1.25 per cent surprised positively and corporate and overseas slippages were high, but with the cycle turning, corporate slippage will likely come down leading to the partial normalisation of its ROE. In spite of the pandemic, BoB reported a pre-tax ROE of 8 per cent in FY21, and with the improving corporate cycle we expect its ROE to inch to 10-11 per cent by FY23,” it said.

For march quarter, the lender’s loan book grew 4.9 per cent on-year during the quarter to Rs 6.4 lakh crore, while deposits climbed 6.2 per cent to Rs 8.6 lakh crore. However, the retail loan portfolio showed firm growth of 14.4 per cent on-year to Rs 1.2 lakh crore.

CLSA said that while the risk from the second wave of Covid-19 remains for its retail book and a true picture of SME stress will be reflected in the second half of FY22, the corporate cycle is clearly turning, and hence the PSU bank will also benefit from the trend.

The brokerage expects credit costs to normalise to 1.3 per cent of loans by FY23, which will drive a partial normalisation of return on equities (ROEs) following the second wave. For FY22, it is penciling in 1.8 per cent of credit costs.

Emkay Global has a ‘buy’ rating on the stock, given higher retail orientation, reasonable capital position and favorable risk-reward at current valuations among PSBs.

“Over the next few quarters, we are likely to develop more comfort on slippages as corporate India is holding up well, which implies that the overall slippages are likely to be manageable. Dilution risk is lower given that the CET-1 ratio is at 11 per cent. As compared to SBI (1.5 per cent), the net NPL for BoB (3.1 per cent) is still high, which implies that the return to normalised levels of RoEs could be slower and likely to be behind SBI,” Kotak Securities said.