Bank of Baroda rises 5% on Morgan Stanley Upgrade, Know TARGET Here
Bank of Baroda best placed amongst non-SBI SoE (State Owned Enterprise) banks – upgrade to Overweight. Morgan Stanley upgrades target price on Bank of Baroda to Rs 110 from Rs 100. Bank of Baroda share price made a high of Rs 86.25 today, up over 5% or Rs 4.5
Bank of Baroda best placed amongst non-SBI SoE (State Owned Enterprise) banks – upgrade to Overweight. Morgan Stanley upgrades target price on Bank of Baroda to Rs 110 from Rs 100. Bank of Baroda share price made a high of Rs 86.25 today, up over 5% or Rs 4.5.
Morgan Stanley says FY22 will see a tussle between higher restructured loans and lower NPLs, amid a turn in the corporate NPL cycle. Morgan Stanley expects credit costs to moderate in F22; the extent will depend on the duration of existing/new Covid-19 waves.
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Non-SBI SOE banks' impaired loan formation in F21 was elevated (similar to F20) and much weaker than SBI's. The underperformance was led by corporate as well as retail banking.
Having said that, Morgan Stanley expects moderation in F22,given:
a) lower corporate NPLs
b) moderation in retail slippages
c) modified ECLGS lending scheme, which allows extension of interest-free period (see our report)
However, collection efficiency for non-SBI SOE banks is much lower than at SBI (see Exhibit 19) – this will drive greater restructuring during 1H-F22, in our view. As a result, Morgan Stanley expects bad loan formation to moderate but remain elevated – Morgan Stanley expects BOB to do relatively better among non-SBI SoE banks.
In F21, credit costs were elevated at 170 - 275bps and drove better NPL coverage ratios. However, banks still have limited coverage on restructured loans – in F22, the stock of restructured loans will move higher,and hence SoE banks will still need to catch up on provisions. Consequently, Morgan Stanley expects credit costs to moderate in F22, but normalization will likely be a F23 event (assuming no severe third wave of Covid-19 cases in India).
Morgan Stanley continues to prefer SBI among SOE banks, followed by BOB (which we upgrade to OW).
BOB's balance sheet has improved materially over the past few quarters, and margin of safety is one of the best among SOE banks. We expect earnings to improve gradually as the corporate NPL cycle turns, driving higher profits in F22and onwards (Morgan Stanley are 15%/10% ahead of consensus on F22/23 earnings estimates, respectively).
Morgan Stanley believes current valuations at 0.5xF22e BV do not price in the forthcoming ROE recovery (~11% for F23E). Stay Equal weight on PNB and Underweight on Bank of India / Canara Bank. Key downside risk would be greater than expected asset quality / growth challenges from waves of Covid-19 cases.
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