Markets
Bank of Baroda’s NIM slips in Q1; recovery crucial for stock
Summary
While the accretion of deposits was muted sequentially, the management expects to continue to mobilize on its deposits base.Public sector lender, Bank of Baroda (BoB), reported its June quarter (Q1FY24) results on Saturday. As is the case with most large banks, BoB also saw a sequential decline in net interest margin (NIM), though the fall was sharper than most analysts’ estimates. In Q1, NIM was down 26 basis points (bps) sequentially to 3.27%. This was mainly on account of lower yields on its loans and rising cost of funds. Understandably, the stock was down about 2% during the early trading hours on Monday, though it later recouped the loss considerably.
That said, since some portion of MCLR-linked loans is yet to be repriced, the management has maintained its NIM guidance for FY24 at 3.3%. While this bodes well with investors’ sentiment, analysts are cautious, trimming their margin estimates as it remains to be seen as to how much it can offset the increase in cost of funds. Analysts at Prabhudas Lilladher, for one, are factoring an 8bps decline in NIM to 3.08%.
The stable NIM outlook stems from favourable credit demand in the market. In Q1, BoB’s loan growth stood at 20% year-on-year. Growth is above the company’s FY24 loan growth guidance of 14-15%. Here, the management expects to grow higher than the industry in the retail segment at 18-20%. Also, with the corporate segment slowly recovering, the bank is targeting a corporate and a non-corporate loan book of 35:65 (it is 43:57 in FY23). In FY24, it aims to grow its corporate book by 12-13%. These factors bode well for the company’s growth outlook.
On the deposits front, while the accretion of deposits was muted sequentially, the management expects to continue to mobilize on its deposits base.
This apart, the management expects to deliver return on asset (RoA) guidance of 1% for FY24 by additionally focusing on the fee income. “Even if margin compresses in the upcoming quarters, fee income will help the bank maintain a 1% RoA," point out analysts at Motilal Oswal Financial Services. Last quarter, despite the lower-than-expected net interest income, dragged by NIM contraction, BoB delivered RoA of 1.1%. This was mainly aided strong by fee income which grew 18% y-o-.
Additionally, the bank’s asset quality metrics, gross non-performing assets (GNPA) and net NPA have continued to improve during Q1 despite marginal increase in slippages. As of June 2023, the GNPA and NNPA fell sequentially to 3.51% and 0.78% respectively. With respect to the airline account (GoAir), the management has created sufficient provisions and expect full recoveries.
Meanwhile, in the past one year, the stock has rallied nearly 63%. After the sharp-up move, upsides hereon would be capped until the margin trajectory is clear.
