Bank of Baroda Q1 FY27 earnings hit by settlement provision as NIMs decline

Investment View and Valuation

Motilal Oswal Financial Services Limited retains a Neutral rating on Bank of Baroda and revises the target price to Rs 275, based on 0.9 times March 2028E adjusted book value. The broker characterises Q1 FY27 as a modest quarter, with earnings affected by a one-off provision and operating performance remaining relatively weak because of margin pressure and lower core fee income.

Motilal Oswal reduced its FY27 and FY28 profit after tax estimates by 18.9 per cent and 5.2 per cent, respectively, principally to reflect the one-time settlement impact.

Q1 FY27 Financial Performance

Bank of Baroda reported Q1 FY27 profit after tax of Rs 12.8 billion, down 72 per cent year on year and 77 per cent quarter on quarter. The result included a Rs 56.7 billion one-off provision, equivalent to USD 600 million, for settlement of legal claims of the NMC group. Adjusted for this item, profit after tax was Rs 55.3 billion.

Net interest income grew 10 per cent year on year and was flat sequentially at Rs 125.3 billion, around 3 per cent below Motilal Oswal's estimate. Reported net interest margin declined 12 basis points quarter on quarter to 2.77 per cent, owing to a drop in domestic margins.

Other income fell 26 per cent year on year and 13 per cent quarter on quarter to Rs 34.7 billion amid soft core-fee traction. Total income of Rs 160 billion was 6 per cent below the broker's estimate, while operating profit declined 1 per cent year on year and 10 per cent sequentially to Rs 81.3 billion.

Business Momentum and Deposit Trends

Business momentum was soft sequentially. Advances grew 16.5 per cent year on year but declined 0.9 per cent quarter on quarter. Growth was led by the RAM portfolio: retail advances rose 18.4 per cent year on year and 2.3 per cent sequentially, while MSME advances increased 20.3 per cent year on year and 2.2 per cent quarter on quarter.

The corporate book fell 6.5 per cent sequentially as loans gradually shifted towards MCLR-linked products. Deposits increased 13.8 per cent year on year but declined 0.9 per cent sequentially. Domestic CASA deposits rose 10 per cent year on year and fell 4 per cent quarter on quarter, reducing the domestic CASA ratio to 37.7 per cent from 38.9 per cent in Q4 FY26.

Asset Quality and Credit Costs

Asset-quality indicators were broadly stable, although provisions increased 221 per cent year on year and 101 per cent quarter on quarter to Rs 63.2 billion due to the settlement provision. Slippages rose to Rs 34.2 billion.

Conservative write-offs led to a 10-basis-point sequential increase in the GNPA ratio to 1.99 per cent and a 5-basis-point increase in the NNPA ratio to 0.50 per cent. SMA 1 and 2 improved to 0.07 per cent from 0.18 per cent in Q4 FY26.

Motilal Oswal sees no inherent asset-quality concern, but expects credit cost to remain elevated at around 60 basis points in FY28 because of the expected credit-loss transition.

Management Guidance and Expected Credit-Loss Transition

• Management maintained credit-growth guidance of 12-14 per cent and net interest margin guidance of 2.75-2.95 per cent.
• The bank guided for return on assets above 1 per cent for the rest of FY27.
• Management stated that cost of funds has largely bottomed out and that improved yields should provide incremental support.
• Bank of Baroda had mobilised more than USD 600 million of FCNR(B) deposits and is targeting total flows of USD 4-5 billion through FCNR(B) deposits and OFCBs.
• Management estimated the expected credit-loss transition impact at 110 basis points of CRAR, or Rs 120 billion, which can be spread over several years.
• The steady-state impact on credit costs could be 15-20 basis points, while the bank also has a Rs 25 billion floating provision to support the transition.

Broker Forecasts

Motilal Oswal forecasts FY27E and FY28E return on assets of 0.85 per cent and 0.96 per cent, respectively.