Mutual Funds Buying Bank of Baroda. The question arises: should you consider doing the same?
Bank of Baroda- Banking stocks experienced a significant decline on January 6, 2025, with many PSU bank stocks taking a substantial hit. Union Bank saw an 8% decrease, while Bank of Baroda slipped by 6% and IDBI Bank fell by 5%. This decline was primarily due to the disappointing provisional numbers for the December quarter. However, the numbers for Bank of Baroda were not as bad as expected.
Domestic deposits increased by 9.2% year on year, while global deposits grew by 11.8% YoY to INR13.9 lakh crore, and global advances were up by 11.7% at INR11.7 lakh crore. On January 7, Bank of Baroda’s stock price rebounded, closing nearly 2% higher at INR232. Although these numbers are not exceptional, mutual funds are beginning to show interest in the stock. The stock’s price-to-book value is currently around 1x, compared to 1.1x a year ago, while SBI has been trading at around 1.7x.
Institutional investors believe that with time, the bank’s management, led by MD and CEO Debadatta Chand, will be able to deliver on the tepid growth. Chand assumed his role on July 1, 2023, after serving as the bank’s executive director, overseeing various verticals. He is a market-savvy CEO with experience on the boards of BoB Capital Markets and the erstwhile PNB Principal Mutual Fund.
For institutional investors, Bank of Baroda appears to be a ‘value buy’, especially considering its valuation and the potential opportunities ahead. HDFC Small Cap Fund Growth purchased shares of Bank of Baroda in November for the first time in 15 months, increasing the bank’s share in the total scheme AUM to 3.41%. Similarly, SBI Balanced Advantage Fund maintained its shareholding of Bank of Baroda unchanged between November
Mutual funds have been increasing their holdings of shares in the bank, acting as net buyers in both October and November. The mutual fund holding in Bank of Baroda saw an increase in July-September for the first time in at least seven quarters, rising to 8.81% from 9.81%.
Despite this, the bank has underperformed the benchmark indices over the past year, with only a 4% return compared to the 10% gains in the Nifty 50 and 12% in the Nifty PSU Bank Index. In contrast, State Bank of India saw a 24% increase during the same period.
The reduction in mutual fund holding can be attributed to various factors, with regulatory issues and slower business growth being the main concerns, according to analysts. Two years ago, Bank of Baroda was a top choice in the PSU bank sector due to its superior growth, but that advantage has since diminished. This has led to a normalization of valuations, making it just another PSU bank. Investors have favored State Bank of India for its stability, especially in the retail book, amidst concerns over unsecured loans.
In October 2023, the Reserve Bank of India prohibited Bank of Baroda from onboarding customers onto the ‘BoB World’ mobile application due to issues with the customer onboarding process. This application played a significant role in driving business, with a large percentage of accounts being sourced digitally. The incident came as a surprise to investors, as Bank of Baroda was considered to be a more technologically advanced lender among its PSU peers, following State Bank of India.
The restrictions were lifted in May 2024, causing shares to surge over 3%. However, the gains were short-lived due to investor concerns about slower deposit growth potentially impacting overall loan growth. Additionally, worries about defaults in unsecured loans added to the woes.
Despite these challenges, some fund managers are now taking a fresh view on the stock.
Changed Perspective
After the September-quarter earnings, Kotak Institutional Equities maintained an ‘add’ rating on Bank of Baroda. They noted that the impact of regulatory and business concerns seemed limited to earnings and profitability ratios in recent quarters. The bank’s guidance on growth, net interest margin, and slippages remained stable.
ICICI Securities, with a ‘buy’ rating on the stock, values the bank at ~1x FY27E ABV with a target price of INR300, indicating a 29% upside. However, Jefferies downgraded the stock to ‘hold’ from ‘buy’ and reduced the price target to INR270, citing lower potential for re-rating and compounding.
The bank has committed to maintaining a return on assets above 1%. Consider these factors when deciding whether to follow fund managers in buying Bank of Baroda stocks.
The bank’s management strategically constructs its asset and liability book to optimize its net interest margin and return on assets. They have set a NIM guidance of 3.15%, with a variance of plus or minus 5 basis points. The bank anticipates the cost of funds to stabilize by early January due to expected improvements in systemic liquidity.
In the September quarter, the NIM was reported at 3.10%, a decrease of 8 basis points quarter over quarter.
Regarding deposit and loan growth, data compiled by Indus Equity Advisors shows that since the December 2022 quarter, deposit growth has lagged behind loan growth for Bank of Baroda. In October, the bank revised its guidance for FY25 deposit growth from 10%-12% to 9%-11%. Management stated that achieving around 11% growth in the December and March quarters is necessary to meet this guidance.
Provisional data for the December quarter revealed that global deposits increased by 11.8% year over year to INR13.9 lakh crore, while global advances rose by 11.7% to INR11.7 lakh crore. Domestic deposits, accounting for 84% of the total, grew by 9.2%, while domestic advances were 11.8% higher as of December 31. Domestic loans comprised 82% of the total credit book.
Provisional data for the December quarter indicates that global deposits increased by 11.8% year-over-year to INR13.9 lakh crore, while global advances rose by 11.7% to INR11.7 lakh crore.
Of the total, domestic deposits, accounting for 84%, experienced a growth of 9.2%, while domestic advances were 11.8% higher as of December 31. Domestic loans comprised 82% of the total credit book.
The bank has revised its credit growth target for FY25 to 11%-13% from the previous range of 12%-14%. CEO Chand expressed confidence in achieving the upper end of the target, particularly with the upcoming productive quarters of Q3 and Q4.
Asset quality remains a key focus for Bank of Baroda and other banks. Kotak Institutional Equities anticipates a positive discussion on asset quality, with unsecured loans performing better than expected. However, microfinance remains a concern.
For Bank of Baroda, the brokerage projects slippages around 1.3%, slightly above the management’s guidance of 1%-1.25%. The bank aims to keep credit costs below 0.75% for the current fiscal year. In the September quarter, the gross NPA ratio decreased to 2.50% from 2.88% in the previous quarter.
Despite higher slippages in MSME and retail sectors in Q2, the limited exposure to unsecured credit and a slowdown in unsecured retail credit growth are expected to mitigate major concerns, according to ICICI Securities.
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Disclaimer: This blog post is for informational purposes only and should not be considered financial advice. Investors should conduct thorough research and consult with a qualified financial advisor before making any investment decisions.