Bank of Baroda’s stellar Q2 drives re-rating; stock gains 10%

Public sector lender Bank of Baroda surprised the Street with a slew of positives in its September quarter earnings performance. Improvement in asset quality and net interest income aided the bank's profit, which exceeded analysts' expectations. Also, it's loan growth increased 20.6% year-on-year in Q2FY23.

In reaction, shares of the bank jumped 10% on the NSE in Monday's opening trade.

What's more, the management commentary was upbeat, which has given investors' confidence a further boost. In an earnings call with analysts, the bank's management said that it expects overall credit growth to be around 14-16% for FY23. According to Yes Securities Ltd, the bank's management stated that BoB would grow at the industry level, which itself translates to an enhancement of growth guidance. Further, the bank's focus remains on margin improvement and overall NIM is likely to be up by 10 basis points in FY23 versus FY22, added the management. One basis point is 0.01%.

Consequently, the stock has seen a re-rating. "We have upgraded our earnings estimates on the back of margin improvement and lower credit cost, driven by improving asset quality," said analysts at Nirmal Bang Institutional Equities in a report on 6 November.

Similarly, analysts at Motilal Oswal Financial Services have raised the bank's FY23 earnings estimates by 10%, factoring in higher net interest income and lower credit cost. "We estimate FY24 RoA/RoE of 1.0%/13.9%," added the Motilal Oswal report. RoA is return on asset. RoE stands for return on equity.

According to the bank's management, the upward repricing of loans will continue to outpace deposit cost for the bank for some time. Also, the bank would maintain discipline in terms of deposit rates repricing. Even so, in a rising interest rates scenario, movement in NIM and credit costs will be among the crucial monitorables, as competition for deposits gets intense among banks.