Bank of Baroda delivered a mixed but fundamentally resilient Q3FY26 performance, balancing margin compression with improving asset quality and sharply lower credit costs. While net interest margins softened due to faster asset-side repricing, strong RAM-led loan growth, benign slippages, and robust recoveries helped sustain profitability. The bank continues to operate with operationally clean earnings, stable liquidity, and improving balance-sheet strength. Management’s confidence in maintaining asset quality, combined with a range-bound margin outlook and moderated credit costs, supports ICICI Direct’s BUY recommendation, with valuation anchored at 1x FY28E adjusted book value and a target of Rs 340.

Q3FY26: Growth Momentum Offsets Margin Pressure

Bank of Baroda’s Q3FY26 performance reflected steady business traction despite near-term margin headwinds. Global advances expanded 14.7% year-on-year and 5.2% sequentially, driven largely by strong momentum across retail, agriculture, and MSME segments. Corporate lending, which had remained subdued earlier in the year, also staged a recovery with 8% YoY growth.

Deposit growth remained healthy at 10.3% YoY, supported by granular accretion rather than wholesale funding. The loan growth outpaced deposits during the quarter, leading to a moderate increase in the credit-deposit ratio. Importantly, liquidity metrics remained comfortable, with management reiterating confidence in operating within an 82–85% CD ratio band.

Margins Under Pressure, But Range-Bound Outlook Intact

Net interest margins declined 17 basis points quarter-on-quarter to 2.79%, largely due to technical and timing factors. Faster repricing of EBLR-linked assets, along with normalization of interest on income tax refunds, weighed on spreads during the quarter.

However, management expects margin pressure to stabilize. With most asset-side repricing already completed and the full benefit of deposit repricing expected to flow through in Q4, FY26 exit margins are guided in the 2.85–2.9% range. While future repo cuts may exert mild pressure, liability-side repricing is expected to act as a natural hedge.

Asset Quality: A Clear Positive Surprise

Asset quality trends remained one of the strongest pillars of the quarter. Gross NPAs declined sequentially to 2.74%, while net NPAs remained contained at 0.57%. Slippages stayed well within guided levels, and recoveries remained strong, resulting in a sharp 35% QoQ reduction in provisions.

Credit costs moderated to 0.17% in Q3FY26, prompting management to revise full-year credit cost guidance downward to below 0.6%. Early delinquency indicators, including SMA-1 and SMA-2 buckets, remain benign, reinforcing confidence that stress across both retail and corporate books has largely peaked.

Operational Earnings Quality Remains Clean

ICICI Direct highlighted that Q3FY26 profits were driven entirely by core operations. There were no material one-offs in treasury income or non-interest income, underscoring the sustainability of earnings. Other income was supported by recoveries from written-off accounts, while fee income remained stable.

Return metrics stayed healthy, with RoA sustaining above 1% for the 14th consecutive quarter and RoE at mid-teen levels. This consistency reflects disciplined underwriting, prudent risk management, and steady operating leverage.

Capital Position and Regulatory Readiness

The bank’s capital position remains comfortable despite regulatory transitions ahead. CET-1 ratios dipped marginally during the quarter due to AFS valuation impacts and AT-1 redemptions, but overall CRAR remains around 17%.

Management reiterated preparedness for the upcoming Expected Credit Loss (ECL) framework, noting existing buffers such as floating provisions of nearly Rs 1,000 crore. The estimated net impact of ECL on capital is expected to be manageable over the regulatory glide path, with no immediate requirement for equity or AT-1 issuance.

Growth Outlook: RAM Continues to Lead

Bank of Baroda’s medium-term growth strategy remains anchored in RAM segments. Retail, agriculture, and MSME advances posted robust double-digit growth, with retail credit expanding across home loans, auto loans, mortgages, and education loans.

Management maintained FY26 loan growth guidance at 11–13%, with potential upside if corporate demand continues to improve. Deposit growth is guided at 9–11%, with continued emphasis on low-cost, granular funding rather than wholesale deposits.

Valuation Framework and Target Price

ICICI Direct continues to value Bank of Baroda at approximately 1x FY28E adjusted book value. While margins are expected to remain range-bound, improving asset quality, moderation in credit costs, and steady RAM-led growth are likely to support profitability and balance-sheet compounding.

Based on this valuation approach, ICICI Direct maintains a BUY rating with a target price of Rs 340, implying an upside of about 21% from current levels.

Key Financial Snapshot (Rs crore)

Key Risks to Monitor

Margin compression persisting longer than expected due to adverse rate movements could weigh on near-term profitability.
Slower-than-anticipated credit growth, particularly in corporate lending, could limit operating leverage.

Investment View

Bank of Baroda remains one of the strongest operating franchises among public sector banks. While margin volatility may persist in the near term, the bank’s improving asset quality, disciplined capital management, and clean earnings profile provide a solid foundation for sustainable returns. For investors with a 12-month horizon, ICICI Direct’s BUY recommendation remains well-supported.