Markets
Bank of Baroda ends FY23 on a strong note
Summary
Profit after tax more than doubled year-on-year to ₹4,775 crore, beating consensus estimates. Net interest income (NII) rose almost 34%, aided by strong credit growth momentum.Public sector lender Bank of Baroda’s (BoB) March quarter (Q4FY23) earnings performance was an all-round show. Profit after tax more than doubled year-on-year to ₹4,775 crore, beating consensus estimates. Net interest income (NII) rose almost 34%, aided by strong credit growth momentum.
Healthy NII aided the bank’s profitability, translating into robust net interest margin (NIM) growth. Both global and domestic NIMs continued their improving trajectory in Q4. Global NIMs stood at 3.53% in Q4, up 16 basis points sequentially. This is impressive, considering that deposit rates have started to inch up.
However, with lagged effects of interest rate hikes still flowing in, and deposit rates rising, NIMs are set to moderate. The bank believes it should be able to protect margin at 3.3%. There are a few margin levers that could play out in favour of BoB. For instance, management noted that 60% of its loan book is linked to MCLR, which would get repriced in the coming quarters. Over 90% of BoB’s loan portfolio is under floating rates. Plus, the pressure to raise deposit rates has eased with the Reserve Bank of India’s (RBI) latest decision to pause interest rate hikes, the management added.
Some analysts say BoB’s NIM has peaked in Q4 and investors should be ready for margin compression in FY24.
Steady demand for credit helped BoB clock strong loan growth of 21% in Q4. This was led by increased traction in the retail and corporate loan segments. Going ahead, the management expects to grow slightly higher than the industry’s credit growth rate. “If the system growth is around 12-13%, keeping underwriting standards and margin in perspective, if possible, we would like to grow 13-14%," the management said in the earnings call.
While the outlook on credit growth is relatively encouraging, the bank is not immune to the macro risk of slowing credit demand. “BoB will also see some impact of the likely moderation in systemic credit growth in FY24, even as Q4 was an extraordinary quarter for loan growth," said an analyst on condition of anonymity. But deposit growth lagged credit growth in Q4 at 15%. Hereon, like peers, trajectory of deposit growth is among key monitorables.
Further, the bank’s asset quality was impressive, thanks to negligible slippages and lower provisions. As on 31 March, gross non-performing assets (GNPA) and net NPA (NNPA) fell sequentially to 3.79% and 0.89%. In Q3, GNPA and NNPA stood at 4.53% and 0.99%, respectively. Another positive was that the bank’s credit cost at 0.14% in Q4 and 0.53% for FY23 was at a record low. This was aided by a sustainable improvement in asset quality. The management expects to maintain credit cost of less than 1% going ahead. The bank’s focus on maintaining asset quality is good for its medium-term earnings outlook, said analysts.
Meanwhile, in the last one year, the stock has rallied 87%, handsomely beating Nifty Bank index. The stock has been rewarded for its stellar credit growth and improving asset quality. To be sure, investors will have to watch out for potential earnings impact from RBI’s Expected Credit Loss (ECL) provisions, which may come into force this year. This could have a bearing on the bank’s provisioning requirement and hurt return ratios.
“The trends in asset quality and ECL provisioning norms need monitoring. The stock trades at 0.8 times FY25 price-to-book and that offers comfort," said an analyst, requesting anonymity. Even so, the stock’s sharp outperformance in the past one year could limit large near-term upsides.
