Bank of Baroda’s stable NIM offsets fee weakness as asset quality holds

Investment View and Valuation

In its July 25, 2026 Q1 FY27 result update, Prabhudas Lilladher retained its ACCUMULATE recommendation on Bank of Baroda, describing the investment case as one of volatile core earnings but attractive valuation. The broker reduced its target price to Rs 280 from Rs 290 while retaining its FY28 adjusted book value multiple of 0.9 times. The stock was trading at 0.8 times FY28 adjusted book value, supporting the broker’s valuation view despite near-term earnings volatility.

Q1 FY27 Financial Performance

Bank of Baroda reported a mixed Q1 FY27. Net interest income was Rs 12,150.1 crore, up 10.0 per cent year on year and 4.6 per cent above Prabhudas Lilladher’s estimate. Calculated NIM was 2.67 per cent versus the broker’s 2.56 per cent estimate. Reported NIM adjusted for the income-tax refund was stable sequentially at 2.69 per cent. Management reiterated FY27 NIM guidance of 2.75-2.95 per cent despite Q1 NIM of 2.77 per cent.

Fee Income and Operating Costs

Fee income declined to Rs 1,237 crore, down 21.5 per cent year on year and 38.5 per cent sequentially, and was 26.8 per cent below the broker’s estimate. Bank of Baroda attributed the decline to an all-in-yield approach, under which processing and other fees may be forgone to win high-ticket advances. Management identified fee optimisation as an area requiring improvement.

Operating expenses were 3.9 per cent above the broker’s estimate, as higher staff costs outweighed lower other operating expenses. Staff costs reflected an AS-15 actuarial-linked provision associated with yield movements; management said underlying operating expenses remained controlled. The bank also booked a Rs 365 crore revaluation gain from yield softening between the March and June closings.

Exceptional Item and Asset Quality

Reported PAT was Rs 1,278.4 crore and core PAT was Rs 361.1 crore. The quarter included full recognition of a Rs 5,680 crore exceptional item related to the settlement of legacy NMC litigation. The settlement resolved legal proceedings without admission of liability, while recovery proceedings against the principal accused continue.

Asset quality was broadly steady, with GNPA at 1.99 per cent. Gross slippages were Rs 3,420 crore, recoveries were Rs 1,690 crore and collection efficiency excluding agriculture remained above 99 per cent. Management maintained FY27 slippage guidance of 1.0-1.25 per cent and credit-cost guidance of 0.6 per cent. CRILC SMA improved to 0.07 per cent, and management saw no meaningful geopolitical stress, with MSMEs supported by ECLGS.

Advances, Deposits and Funding Outlook

Advances and deposits grew 17.6 per cent and 13.8 per cent year on year, respectively. However, advances declined 0.9 per cent sequentially, mainly because domestic corporate loans fell 6.5 per cent. Bank of Baroda deliberately exited low-yield corporate loans and shifted towards MCLR/EBLR-linked lending to protect margins.

Retail and SME advances grew 2.3 per cent sequentially, while the decline in gold loans was described as seasonal. Management retained FY27 guidance of 12-14 per cent credit growth and 10-12 per cent deposit growth, citing geopolitical uncertainty.

The bank targets Rs equivalent of US$4-5 billion of NRI-related FCNR funding after mobilisation crossed US$600 million. It plans to maintain the liquidity coverage ratio at 120-127 per cent to limit liquidity drag.

Forecast Revisions and Expected Credit Loss

Prabhudas Lilladher raised its FY27 and FY28 NIM estimates by 5 basis points each, reduced fee assumptions by an average 10 per cent and increased FY28 provisions by 12 basis points because the sustainable expected credit loss impact could be about 20 basis points.

Management estimates the one-time expected credit loss impact on CRAR at 110 basis points, or about Rs 12,000 crore, with Rs 2,500 crore of floating provisions earmarked for the transition. The broker stated that the net effect on core PAT was not material.

Key Risks to the Investment Thesis

• Continued weakness in fee income.
• Elevated expected-credit-loss provisioning.
• Lower CASA.
• Geopolitical uncertainty.
• Volatility in core earnings.