Emkay Global has reaffirmed its BUY rating on Bank of Baroda (BoB) with a revised target price of Rs 280, citing robust credit growth, resilient asset quality, and healthy return ratios. Despite persistent pressure on net interest margins (NIMs), the bank’s well-capitalized balance sheet, disciplined liability management, and consistent retail growth underpin confidence in its forward trajectory. While near-term margin contraction remains a concern, BoB’s diversified loan portfolio and stable provisioning are expected to cushion profitability and sustain a return on assets (RoA) of over 1%. Emkay’s valuation implies a 24% upside, offering a compelling case for investors focused on the Indian banking sector.

Strong Credit Growth Despite Margin Compression

BoB recorded a YoY credit growth of 13.5%, with quarterly growth at 5.1%, led by Retail, Agriculture, and MSME (RAM) segments. Retail loans, especially in vehicle and personal finance, outperformed while corporate loan growth rebounded after a lackluster Q3.

However, net interest margin (NIM) declined by 8bps sequentially to 2.86%, hit by a combination of lower loan yields, higher bulk deposit costs, and a marginal day-count impact. The compression follows a 16bps decline in Q3, signaling ongoing pressure amidst repo rate cuts.

Management maintains guidance for a 3% full-year NIM, but Emkay views this as optimistic given the rate environment. Further repo reductions could narrow spreads, especially given BoB’s exposure to rate-sensitive retail and repo-linked instruments.

Asset Quality Holds Firm Amid Sector-Wide Stress

Gross NPAs improved by 17bps QoQ to 2.3%, with net NPAs at 0.6%. The marginal rise in slippages to Rs 31.6 billion (1.2% of loans) was primarily in the MSME, agri, and retail segments — mostly from legacy accounts.

BoB also benefitted from higher write-offs, including fully provisioned accounts, which helped suppress headline stress ratios. The bank recovered Rs 10.6 billion from Bhushan Power, although there’s risk of a partial clawback depending on the JSW legal outcome.

Encouragingly, the bank’s Special Mention Account (SMA) book stands at a low 0.33%, and would drop below 0.1% excluding a lumpy state-guaranteed account — a reflection of tight underwriting and vigilant collections.

Loan and Deposit Dynamics Reflect Strategic Focus

Management continues to steer the loan book towards higher-yielding RAM segments, targeting a >15% growth rate in RAM loans and ~10% in corporate credit. The RAM mix inched up by 200bps YoY, with retail comprising 21%, MSME 11%, and agri loans 13% of the domestic credit pie.

On the deposit side, BoB is aggressively rebalancing its reliance on bulk deposits. Currently, bulk deposits account for 20% of the book, with repricing in Q4 weighing on funding costs. CASA ratio remained stable at 40%, with 76% of CASA deposits from retail customers.

BoB's capital adequacy ratio rose to a robust 17.2%, with Tier I at 14.8%, providing a buffer for growth and provisioning.

Profitability and Earnings Outlook

The bank posted Q4FY25 net profit of Rs 50.5 billion, beating Emkay’s estimates due to higher other income and controlled operating expenses.

While FY25 net interest income (NII) grew just 2% YoY due to funding cost pressure, non-interest income surged 15% YoY to Rs 166 billion, aided by Rs 20 billion in Available-for-Sale (AFS) reserves and recovery from technical write-offs.

For FY26–28E, BoB is expected to maintain a steady RoA of 1.0% and RoE around 13%, supported by treasury gains, asset quality stability, and moderate provisioning.

Here is a snapshot of Emkay’s revised earnings forecast:

Valuation and Recommendation

Emkay has revised its target price to Rs 280, down from Rs 300, after cutting FY25–27 earnings estimates by 3–5% to account for margin compression and slower growth.

The target implies a 0.9x FY27E adjusted book value, factoring in Rs 15/share contribution from subsidiaries and investments. At current levels, BoB trades at an attractive valuation of 0.7x FY26 ABV, offering a solid risk-reward profile.

Despite cyclical headwinds, the brokerage believes the combination of prudent liability management, consistent capital adequacy, and earnings resilience justifies the continued BUY call.

Risks and Strategic Takeaways

While the outlook is constructive, investors must monitor several potential risks:

Further rate cuts could exert more pressure on NIMs, challenging margin guidance.

Unexpected stress in MSME or agri portfolios could worsen slippages.

Macroeconomic shocks could stall credit growth, impacting fee income and operating leverage.

However, BoB’s strong franchise, conservative provisioning, and digital transformation investments position it well to weather near-term turbulence and capitalize on medium-term recovery.

Disclaimer: Investors are advised to conduct their own due diligence before making any investment decisions.