Bank of Baroda - Strong Core Trends; One-Off Gains Bolster Prudential Buffers; Maintain BUY

Bank of Baroda delivered a strong performance in Q2FY27, with RoA improving to 1.26%, aided by a one-off gain of ~Rs37bn from the NSE stake sale and revaluation. The bank utilised ~Rs16bn of proceeds to build prudential buffers, taking reported provisions to 55bps (18bps excluding these provisioning). Loan growth accelerated to 18.5% y/y – which stood at 13.5% ex-FCNR (B) – led by RAM and overseas advances, while asset quality improved with gross/net slippages contained at 82/17bps. NIM remained broadly stable, and the management raised its FY27 loan/ deposit growth guidance to 13-15%/11-13%. The unutilised FCNR (B) liquidity offers further headroom to support growth in H2FY27. Looking ahead, we expect credit growth to remain broadly in line with the system, while profitability should remain steady, aided by healthy operating performance and improving asset quality. We maintain BUY rating on the stock with a revised TP of Rs344, valuing it at 0.9x FY29e P/ABV.

Business growth accelerates: Credit growth accelerated to 18.5% y/y (vs. 17.6% in Q1), led by RAM (up ~19% y/y) and overseas advances (up 39.7% y/y), while domestic corporate growth remained relatively muted at 6.3% y/y. On liability side, deposit growth improved to 16.4% y/y and 11.2% ex-FCNR (B), aided by ~US$8.1bn (~Rs770bn) mobilised under FCNR (B) scheme. The incremental FCNR (B) liquidity, which remains largely undeployed, being retained to support H2 growth. CASA grew 10.4% y/y, while domestic CASA ratio fell 135bps q/q to 36.3%. LCR remained healthy at 133.6%. Reflecting the improving growth trajectory, the management raised its FY27 loan/deposit growth guidance to 13-15%/11-13% (from 12-14%/10-12%) earlier.

Asset quality strengthens; prudential buffers provide ECL cushion: Gross slippages fell to 82bps (from 97bps in Q1), while net slippages moderated to 17bps (vs. 49bps in Q1). GNPA/NNPA ratios improved 21/ 13bps q/q to 1.78/0.37. SMA-1/2 remained negligible at just 6bps of standard advances. Further, the bank created ~Rs16bn of prudential provisioning (~Rs13bn towards loan assets and ~Rs3bn as contingency provisioning on investments, which are not linked to any specific account) over and above its existing Rs25bn floating provisioning. These incremental buffers should provide an adequate cushion against the potential impact of ECL transition.

Stable NIM with healthy profitability: NIM marginally fell by 3bps q/q to 2.74%, as 5bps rise in cost of deposits was largely offset by 4bps rise in yields. The management expects NIM to move towards the upper end of its 2.75-2.95% guided range, aided by repricing of repo-linked book (~38% of loans) after the recent rate hike. Fee income fell 9% y/y (up 27% q/q), and the management expects further recovery, going ahead. The bank expects to deliver RoA of >1% in H2FY27 (~1% for FY27) and has retained its RoE guidance of 15-16%.

Valuation: We maintain BUY rating on the stock with a revised TP of Rs344, valuing it at 0.9x FY29e P/ABV.

Key Risks: (a) Lumpy slippages from corporate book; (b) delayed asset repricing; (c) higher-than-expected impact of ECL transition; and (d) lower-than-estimated credit growth.