In liquidity surplus, better to have secured retail loans – Bank of Baroda

Update on the Indian Equity Market:

On the last trading day before the Union Budget is presented, Nifty 50 ended at 13,635 (-1.3%) dragged by auto and IT stocks. Among the sectoral indices, PSU BANK (+1.7%), PRIVATE BANK (+0.9%), and BANK (+0.7%) led the gainers. AUTO (-2.9%), IT (-2.6%), and METAL (-1.9%) ended the day with losses. Among the stocks, INDUSINDBK (+6.1%), SUNPHARMA (+4.3%), and ICICIBANK (+2.0%) led the gainers, while DRREDDY (-5.3%), MARUTI (-4.8%), and HEROMOTOCO (-3.7%) led the index losers.

Excerpts of an interview with Mr. Sanjiv Chadha, MD, and CEO, Bank of Baroda (BANKBARODA) with CNBC TV-18 aired on 28^th January 2021:

• The bank recently reported its 3QFY21 results with a strong domestic loan growth reported quarter on quarter (QoQ).
• Domestic advances have grown by 8.2% percent YoY and a large portion has come from retail secured loans. The bank plans to increase the share of retail advances to ensure more risk mitigation, and secured retail loans giving better yield than high-rated coupons.
• The CASA growth for the bank had been good and deposit growth had been in sync with the business strategy. Within CASA, current accounts are growing 18%. This is very important to protect the margins when liquidity is surplus.
• In a liquidity surplus situation, the highly-rated corporates are able to command price which is almost unprecedented. They are borrowing at rates which are never seen before. To grow the loan book and protecting interest rate margins, while on the liability side ensuring a large proportion of book comes from CASA, on the asset side it is secured retail loans which give the combination of being good quality, low loss giving default, and giving better coupon. This is the strategy they are following in coming quarters as well.
• The bank witnessed 6.5% YoY growth in its deposits. As the bank wants to closely align the deposit growth to where the advances growth is, and ensuring good quality of deposits growth. The growth in deposits is in line with the previous quarter.
• The credit cost of the corporate book should start looking better. On the retail and MSME, there still is some uncertainty.
• When it came to restructuring, a very small percentage of borrowers opted for restructuring which would seem to suggest that they are comfortable in terms of paying loans.
• The bank is launching a QIP of Rs 200– 400 bn later in the year.

Consensus Estimate: (Source: market screener and investing.com websites)

• The closing price of BANKBARODA was ₹ 68/- as on 29-Janaury-2021. It traded at 0.5x/ 0.4x/ 0.4x the consensus book value estimate of ₹ 147/ 154/ 168 for FY21E/ FY22E/FY23E respectively.
• The consensus target price of ₹ 65/- implies a PB multiple of 0.4x on FY23E BV of ₹ 168/-.

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