We remain ‘overweight’ on Bank of Baroda (BoB) with a price target of Rs 725 a share, which is based on the two-stage Gordon growth model. Our valuations factor in cost of equity at 16.1%, normalised RoE of ~12.9% and terminal growth of 5%.
The stock trades at 0.7x FY15e P/B. Even in an elevated credit-cost scenario, loan growth is robust at ~15% and risk of dilution is low. Once the incremental delinquencies stabilise, we think the stock could re-rate significantly as the core profitability is still strong.
We believe asset quality will peak ahead of its peers as the macro improves. BoB has traditionally been a conservative bank with a relatively low risk profile and, hence, it has a significant advantage over its peers. We believe the bank’s strong capital base is a significant advantage as compared to its peers. The current valuations are undemanding in the context of improving return ratios and we expect the stock to re-rate from here.
We think NPLs will keep rising for another 2-3 quarters, given the weak economy and elevated interest rates. Moreover, credit costs will keep rising beyond that due to the lagged impact of recent delinquencies. BoB, however, should do better than other PSU banks given its relative risk-consciousness in the past and lower loan growth in some of the critical sectors. Also, BoB’s exposure in the infra segment is relatively better than others.
Also, BoB has one of the strongest capital positions among PSU banks. This is a big positive.