Bank of Baroda (BoB) has witnessed a significant decline in its shares, dropping 9.5% since July after three consecutive months of losses. Despite these challenges, Motilal Oswal (MOSL), a prominent domestic brokerage, has reaffirmed its ‘buy’ recommendation for BoB. The brokerage anticipates a moderate Compound Annual Growth Rate (CAGR) of 10% in the bank’s earnings, with a stable Return on Assets (RoA) projected to hover around 1.1% in the coming years.
MOSL has set a target price of ₹290 for Bank of Baroda shares, indicating a potential upside of over 16% from its current market price. This optimistic outlook is hinged on the bank’s improving earnings trajectory and operational efficiencies.
Key Performance Indicators
One of the notable highlights for Bank of Baroda is the robust increase in its RoA, jumping from 0.57% in FY22 to an anticipated 1.17% in FY24. Additionally, MOSL remains confident about BoB’s stock performance, bolstered by enhanced asset quality and an expected cost-to-income ratio of 45% by FY27.
Loan and Deposit Dynamics
Bank of Baroda has experienced strong loan growth at a CAGR of 17% from FY22 to FY24. Meanwhile, deposit growth is projected to mimic the system average at 11% during this period, with advances growth expected to stabilize at 11.5% from FY24 to FY27. This growth is increasingly driven by retail, agriculture, and MSME sectors, as noted by MOSL.
Stock Price Trend
In terms of stock price performance, Bank of Baroda has recorded a 16.66% increase over the past year and an 8% rise in 2024 to date. However, it has faced trading challenges, experiencing a 1% decline in September, following losses of 1.4% in August and 7.9% in July.
Challenges in Deposit Accretion
While Bank of Baroda’s loan book shows promising growth, deposit accretion remains a hurdle. MOSL projects an 11% CAGR in deposits from FY24 to FY27. Recently, the bank decreased its reliance on bulk deposits, aiming to lower that proportion further, as intense competition and slow CASA (current account savings account) growth may lead to elevated deposit costs.
Net Interest Margin (NIM) Outlook
Bank of Baroda’s net interest margin saw a contraction of 35 basis points, reducing from 3.53% in 4QFY23 to 3.18% in 1QFY25 due to rising deposit costs. However, the bank’s strategy to minimize high-cost deposits and improve its CASA ratio is expected to help stabilize its margins. MOSL projects a gradual recovery in margins as interest rates fluctuate, with expectations of a 19 basis point contraction in NIM by FY26.
Operating Efficiency
Operating expenses have surged in FY24 but are projected to moderate, supporting improvements in the cost-to-income ratio. MOSL forecasts a 9% CAGR in operating expenses alongside an 11% revenue growth, driven by a push towards increasing fee income, where Bank of Baroda currently trails its competitors.
Asset Quality Improvement
The asset quality of Bank of Baroda remains strong, with a gross non-performing asset (GNPA) ratio improving from 9.4% in FY20 to an impressive 2.9% in FY24. MOSL anticipates further enhancements, projecting the GNPA to decline to 2.4% by FY27, highlighting the bank’s effective credit management and recovery strategies.
Conclusion
In spite of short-term hurdles, MOSL exhibits a bullish sentiment towards Bank of Baroda’s future prospects. The bank’s strategic moves to curtail high-cost deposits, enhance its operating efficiency, and maintain robust asset quality solidify its position for growth moving forward. Investors are advised to stay informed and consult experts before making any investment decisions regarding Bank of Baroda’s stock.
Disclaimer: The views expressed in this article represent the opinions of individual analysts or brokerage firms and do not reflect the opinions of Mint. It is recommended that investors seek advice from certified professionals before making investment choices.
