Recommendation from Bank - Public Sector

This column gives you a scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

BANK OF BARODA: BEING RESILIENT AT ALL TIMES

HERE IS WHY
✓ Current market trend in favour of banking sector
✓ Third-largest PSU bank in India
✓ Impressive growth in CASA

Despite the recent volatility in the banking system, public sector banks (PSBs) have demonstrated remarkable resilience. Additionally, as the Indian economy grows, it will lead to resurgence in the growth of the banking sector. As per the Reserve Bank of India (RBI), India’s banking sector is sufficiently capitalised and well-regulated. Credit, market and liquidity risk studies suggest that Indian banks are generally sturdy and have withstood the global downturn well. Additionally, the interim budget of 2024-25 has been in favour of PSBs and housing finance companies. Taking all this into account, our recommended scrip is Bank of Baroda.

Currently, Bank of Baroda is the third-largest PSU bank in India, which is engaged in providing various services such as personal banking, corporate banking, international banking, small and medium enterprise (SME) banking, rural banking, non-resident Indian (NRI) services and treasury services. For the third quarter of FY24, its core pre-provision operating profit (PPOP) beat the street expectations due to higher net interest income (NII) and lower operating expenses.

The NII was at ₹11,100 crore due to better margins as loan growth was in tune with the expectations. The net interest margin (NIM) was also ahead at 3.16 per cent owing to lower cost of funds. As higher cost bulk deposits were shed, the domestic cost of deposits was largely flat on a QoQ basis at 5.0 per cent, leading to a positive surprise in reported NIM that increased by 3 bps QoQ. The bank does not expect a major spike in funding cost since most of the re-pricing has been included.

However, for LDR to be at the existing level of 82 per cent, deposit growth on a QoQ basis needs to increase, which may necessitate tapping the bulk deposit markets that may increase funding cost in the fourth quarter of FY24. The bank’s FY24 NIM guidance was intact at 3.15 per cent compared to 3.14 per cent in 9MFY24. Loan growth as expected saw increase of 2.6 per cent on a QoQ basis and 15 per cent on a YoY basis while deposit growth was 8.3 per cent YoY. Its operating expense was lower than expected at ₹6,897 crore due to lower other operational expenses. The core PPOP is at ₹6,120 crore.

The asset quality remained impressive and gross slippages were softer at ₹2,620 crore while recoveries too were better. The core PAT was higher at ₹3,930 crore while PAT was at ₹4,580 crore. For the quarter ended December 2023, the bank’s gross NPAs were at 3.08 per cent from 4.53 per cent in the same quarter the previous year. In the same timeframe, the net NPAs changed to 0.70 per cent from 0.99 per cent in the same quarter the previous year. The bank’s domestic CASA has increased by 94 bps and stands at 40.69 per cent from 41.63 per cent in the same quarter the previous year.

The bank is currently trading at a PE of 7.49 times as against the industry PE of 9.79 times and the three-year median PE of 8.3 times, which show that the stock is undervalued. Even in the case of price to book value we see it as lower than the industry average of 1.4 times compared to the industry average of 1.63 times. In the last three years, the bank has delivered average ROE of 9.07 per cent and ROCE of 5.17 per cent. Taking into account the bank’s business and its market potential, we recommend BUY.