Bank of Baroda dispense may grant 20% return in long period, says Prabhudas Lilladher

Bank of Baroda (BoB) shares are one of those stocks on Dalal Street that have almost doubled shareholders' money in the last year. In the last year, this PSU bank stock has surged from around Rs 92 to Rs 181, delivering almost 100 percent return to its long-term investors. However, Prabhudas Lilladher still sees steam in BoB shares. The brokerage believes that the stock may go up to Rs 220 apiece levels in long term, rising more than 20 percent from the current price of Rs 181 apiece levels.

On the reason for being bullish on BoB share price despite multi-bagger return in 2022, the brokerage report says, "As per RBI, GNPA ratio of SCBs continued to decline and stood at 5.0% (PSU 6.5%) in Sep’22 (7-yr low). The reduction has been broad-based with stress decreasing across sectors of industries, agriculture, services & personal loans. Concentration risk at the system level has reduced as large borrowers’ share in gross SCB loans/GNPA is falling. For BoB, the gross slippage ratio was controlled in H1FY23 at 2.3% vs 2.9% in FY22 while the net slippage ratio too has materially declined from 0.8% in FY22 to 0.2% led by strong recoveries. Hence, GNPA/NNPA ratio declined sharply in Q2FY23 to 5.3%/1.2% from 8.1%/2.8% a year ago. The balance sheet is stronger than ever with PCR at 79% (vs 67% in Q2FY22) and NNPA to equity ratio at a multi-quarter low of 10.5% which would provide leeway to grow."

The brokerage went on to add that driven by the repo rate hike, adjusted NIM (calc.) in H1FY23 improved to 3.22% from 2.95% in FY22 as 93% of loans are floating. While NIM could peak for private banks in Q3FY23 owing to higher EBLR share and sharp deposit rate hikes, PSU banks could see NIM expansion for 1-2 more quarters owing to a higher proportion of MCLR-linked loans.

"For BoB, 53% of overall book is MCLR linked (vs 30% for private banks) and we expect NIM to increase over FY22-23 from 2.95% to 3.3%. With sustained loan growth and a benign asset quality environment, there could be further earnings upgrades across PSU banks. We expect RoA/RoE of 0.9%/14.7% in FY25E compared to 0.6%/9.6% in FY22."

On the suggestion to stock market investors regarding BoB share price, "We remain positive on Bank of Baroda (BOB) given, 1) domestic corporate credit is reviving as growth touched an 8-yr high of +13% YoY and BoB would be a key beneficiary as corporate loan share is ~40% and market share in overall advances is sizeable at 6.6% post-merger 2) BOB could see NIM expansion for 1-2 more quarters while private bank margins might peak in Q3FY22, due to the higher share of MCLR linked loans (53% vs 30% for private banks) 3) balance sheet is stronger as GNPA in Q2FY23 reduced to 5.3% from 8.1% while PCR enhanced from 67% to 79%; expect RoA/RoE to improve over FY22-25E from 0.6%/9.6% to 0.9%/14.7%," adding, "We had recently raised FY23E earnings by 8% for BoB, however, with asset quality risks abating and steady credit growth outlook, there is a likelihood of further earnings upgrade. Rolling forward to Mar’25 ABV, we raise multiple from 1.0x to 1.1x and maintain TP at Rs220. Reiterate ‘BUY’."