Bank of Baroda (BOB) is best placed after State Bank of India within the state-owned banks said Morgan Stanley (MS). In the latest research report, Rahul Gupta of Morgan Stanley has upgraded BOB to overweight with a target price of Rs 110 per share (nearly 34% upside from the current levels of Rs 82 per share). BOB’s balance sheet has improved materially over the past few quarters and margin of safety is one of the best among state-owned banks. Morgan Stanley expects BOB earnings to improve gradually as the corporate NPL cycle turns, driving higher profits in FY22 and onwards. Current valuations at 0.5x FY22 price to book value do not price in forthcoming recovery in Return on equity (ROE) as ROE is seen improving to about 11% for FY23
It was a tough FY21 for non-SBI state-owned banks, but Morgan Stanley sees moderation ahead as the corporate Net performing loan (NPL) cycle turns. FY22 will see a tussle between higher restructured loans and lower NPLs.
However, expects credit costs to moderate in FY22 and the extent will depend on the duration of existing/new Covid-19 waves. Credit cost to moderate in FY22 given lower corporate NPLs, moderation in retail slippages and modified ECLGS lending scheme.
In a June 2021 exclusive interview to ET NOW post the Q4 FY21 results, Sanjiv Chadha, MD and CEO, BOB said, "The bank shifted to the new tax regime which lowers the tax rate for the bank and had we not opted for new tax regime our net profit would have been over Rs 4000 cr for FY21 and the loss was due to shifting to the new tax regime. Believe credit quality for the corporate sector should improve. Chadha expects a reduction in credit cost for the corporate sector to offset a rise in MSME and retail sector, impact on the large corporate segment will be less in the second wave and sees overall growth to be in line with the industry at 7-10% yoy. Board approved raising additional capital of Rs 5,000 cr, which includes Rs 2,000 cr via shares, QIP and the rest via AT1 and Tier II bonds."
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