Sharekhan says that Bank of Baroda posted strong results for Q4FY2021. Core operational performance was below expectations due to one-offs (shift to the new tax regime). Asset-quality performance was also a bright spot. Net interest income (NII) came at Rs 7106 cr, up 4.5% yoy but down 8.3% qoq, below expectations. The bank saw a healthy recovery of Rs 2040 cr from written-off accounts and fee income of Rs 1899 cr, up 13% yoy, which resulted in other income coming at Rs 4848 cr, up 71% yoy. The bank’s pre-provision operating profit (PPOP) stood at Rs 6265.6 cr, up 27.3% yoy and 12.1% qoq and was above expectations. The bank shifted to the new tax regime under Section 115BBA of Income Tax Act. One-time impact of this during Q4FY2021 was Rs 3314 cr (net of additional tax liability under the old regime). 

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As a result, the bank saw a loss of Rs 1046 cr for Q4FY2021. If not for the DTA impact, the bank would have posted PAT of Rs 2267 cr for Q4FY2021 and Rs 4143 cr for FY2021. Notably, this would entail lower tax outgo in future, which would help return ratios. Asset-quality wise, performance was positive with GNPA/NNPA at 8.87%/3.09% as compared to proforma GNPA of 9.63%. SMA1 and SMA2 (as a percent of standard advances) of >Rs 5cr exposure has come down to 3.87% from 4.41% in FY2020, says Sharekhan. 

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Bank of Baroda’s Management commentary was optimistic and positive for the long term and expects credit cost and slippages to improve in FY2022E, along with possible recoveries/upgrades providing a fillip to the stock. Sharekhan believes the bank’s integration is complete, which will result in cost rationalisation. Business restructuring is also expected to yield results in the medium to long term, which will be supportive for margins. Therefore, Sharekhan have fine-tuned their earnings estimates and target multiples accordingly. Sharekhan upgrades their rating to Buy on Bank of Baroda with a revised price target of Rs 100. 

Sharekhan Highlights Bank of Baroda’s Positives, Negatives and Risks:

Bank of Baroda Key positives:

Despite domestic deposits growing by 6.15%, the bank was able to improve CASA ratio to 42.87% for FY2021, up 380 bps yoy
Quality of book improves, with external rating distribution of domestic advances above Rs 5 cr showing below BBB at 9% from 13%. 

Bank of Baroda Key negatives:

Slippage Ratio (%) for Q4FY2021 increased to 6.83% in Q4FY2021 from 2.44% in Q3FY2021 due to some spillover effect as the bank reverted to IRAC norms based on NPL recognition after the standstill was vacated by the Court’s ruling

Bank of Baroda Key Risks:

Risk of further NPAs, especially in the corporate, agri and/or retail books due to overall macroeconomic slowdown and prolonged pandemic recovery would impact growth and profitability