Bank of Baroda core earnings remain resilient despite NMC settlement as loan growth accelerates

Investment View: Core Earnings Remain Resilient

In its July 26, 2026 result update, Anand Rathi Research retained its BUY rating on Bank of Baroda, arguing that the bank’s underlying Q1 FY27 operating performance remained healthy despite a large exceptional item. The broker has set a target price of Rs 319.

Reported profitability was sharply affected by the out-of-court settlement of US$600 million of NMC-related litigation. The settlement reduced return on assets by 90 basis points quarter on quarter to 0.25 per cent. Excluding the NMC impact, Anand Rathi estimates that Bank of Baroda would have reported return on assets above 1 per cent and return on equity above 15 per cent.

Loan and Deposit Growth Accelerate

Business momentum was a key positive in Q1 FY27. Credit growth accelerated to about 17.6 per cent year on year from 16.5 per cent in Q4 FY26, ahead of management’s 11-13 per cent guidance range. Growth was led by the RAM segment and overseas advances. Deposit growth also improved and exceeded management’s guidance, while CASA deposits increased 10 per cent year on year.

Management said Bank of Baroda had raised US$500 million through the FCNR (B) scheme and aimed to mobilise US$4-5 billion in total through FCNR (B), overseas foreign currency bonds (OFCBs) and external commercial borrowings (ECBs). These initiatives should support liability growth.

Asset Quality and Expected Credit Loss Transition

Asset quality remained resilient. Gross slippages declined to 97 basis points in Q1 FY27 from 103 basis points in Q4 FY26, although net slippages increased to 49 basis points from 35 basis points.

The transition to the expected credit loss framework is an important near-term monitorable. Management expects a net impact of Rs 120 billion, or about 120 basis points on CRAR, along with a steady-state increase in credit cost of 15-20 basis points.

Q1 FY27 Financial Performance

Global net interest margin fell 12 basis points sequentially to 2.77 per cent. However, Anand Rathi considers core margin broadly stable after adjusting for the higher income-tax refund impact in Q4 FY26. Management retained its NIM guidance of 2.75-2.95 per cent.

Fee income declined 20 per cent year on year amid competitive corporate lending. Operating expenses to assets increased four basis points sequentially to 1.56 per cent as pension-related employee costs rose with lower government security yields.

Earnings Estimates and Valuation

Anand Rathi expects Bank of Baroda’s credit growth to remain in line with the banking system and profitability to stay steady. The broker raised its FY27E and FY28E net interest income estimates by 0.5 per cent and 1.7 per cent, respectively, and its corresponding PPoP estimates by 1.2 per cent and 3.5 per cent.

FY27E PAT was cut 17.6 per cent to Rs 178 billion, reflecting the exceptional impact, while FY28E PAT was raised 2 per cent to Rs 248 billion. The Rs 319 target price is based on 0.9 times FY28E price to adjusted book value.

Key Risks

• Lumpy slippages in the corporate book.
• Sticky deposit costs.
• Delayed asset repricing.
• Lower-than-estimated credit growth.