Brokerages Remain Cautious On Bank Of Baroda Even As Asset Quality Improves

Shares of Bank of Baroda Ltd. gained as much as 4.5 percent, the most in three months to Rs 195.90, after the bank reported its January-March earnings on Thursday.

Asset quality showed signs of stability as the bank's gross bad loans fell by almost one percentage point to 10.46 percent compared to 11.40 percent at the end of the third quarter.

In absolute terms, however, bad loans were flat at Rs 42,719 crore. The net non-performing assets (NPA) ratio fell to 4.7 percent at the end of the fourth quarter compared to 5.43 percent in the preceding quarter.

Here's what brokerages said about Bank of Baroda post earnings:

Ambit

• Rating: Maintains Sell
• Price Target: Unchanged at Rs 181

• Expect a return on assets (ROA) and return on equity (ROE) of 0.65 and 12 percent in FY18-19
• Expect credit costs at ~130 basis points in FY18-19 versus 220 basis points in FY17
• Declining net stressed assets and relatively high provision coverage on stressed assets are key comfort for the bank
• Current valuation of 1.1 times FY18E book value leaves no upside

Edelweiss Research

• Rating: Maintains Buy
• Price Target: Raised to Rs 210 from Rs 180

• Challenging environment took a toll on the bank's performance
• Expected to still generate near-term RoE of 10-11 percent
• Perceive lower dilution risks even though Basel-III requirements are rising

Jefferies

• Rating: Maintains Hold
• Price Target: Raised to Rs 180 from Rs 170

• Can't rule out lumpy slippages in FY18
• With its CET-1 ratio at 9 percent, the bank needs to find ways to generate capital through various methods.
• Expect RoE to improve to ~14 percent only by FY20
• Forecast FY17-20E earnings per share (EPS) compound annual growth rate (CAGR) of 74 percent on a muted base.
• Deterioration in asset quality, net interest margin compression and growth slowdown some of the key risks to the downside.

Motilal Oswal

• Rating: Maintains Buy
• Price Target: Raised to Rs 217 from Rs 188

• Appreciates management's focus to clean up the balance sheet and lay the foundation for sustainable growth
• Expect stress addition and credit costs to reduce in FY18/19
• Additional buffers like non-core financial investments among other options will lead to dilution-free growth in the near term
• Largely maintain estimates based on residual income model

Morgan Stanley

• Rating: Underweight
• Price Target: Rs 125

• Key to stock performance is pre-provisioning operating profit, which remains muted and pressure expected to continue.
• Starting point of the balance sheet is better than peers
• Stock does not look attractive given current valuation of 1 times FY18E P/B
• Stronger execution by management, higher than expected upgrades, strong measures taken by the government to reduce asset quality risks some of the key factors to the upside