PSU bank stock: Buy Bank of Baroda, says MOFSL as it shares target price 

MOFSL has retained its 'Buy' rating on Bank of Baroda (BOB) with a target price that suggested 17 per cent potential upside, saying the asset quality for the lender stayed steady, but net interest margin (NIM) may turn rangebound in the short-term. All eyes would be on the pace of its deposit mobilisation, the brokerage said. 

BOB clocked 17 per cent CAGR in loan growth over FY22-FY24, as it deployed excess liquidity on the balance sheet. Its CD ratio increased 600 basis points (bps) over the past two years to 80.3 per cent. Going ahead, MOFSL expects advances growth for BOB to moderate to 11.5 per cent CAGR over FY24-FY27, led by faster growth in RAM segments. 

"NIM is expected to remain rangebound in the near term, while potential turn in the rate-cycle will likely drive slight contraction in margins. Asset quality remains robust and we estimate continued improvement in GNPA ratio, with credit cost staying well within the guided range," it said.

MOFSL said Bank of Baroda's earnings may grow at a modest 10 per cent CAGR over FY24-FY27, while its return on asset (RoA) may stay steady at 1.1 per cent. For now, it suggested 'Buy' on the stock with a target price of Rs 290 per share. 

The deposit growth continues to be a challenge for the system and MOFSL estimates BOB to clock 11 per cent CAGR in deposits over FY24-FY27. The bank has reduced its dependency on bulk deposits mix, which now stands at 15 per cent, down from 17 per cent in 1QFY24, and continues to prioritize further reductions in this area, MOFSL said.

It estimates the CD ratio for BOB to increase slightly to 81.6 per cent by FY27. Intense competition for deposits and the upward pressure on funding costs, mainly led by deposit repricing and slower CASA growth, will keep deposit costs high over the near term, it said.

MOFSL estimates the cost of deposits to sustain at 5.3 per cent over FY25 and FY26 against 5.1 per cent in the June quarter.

"The bank’s initiatives to reduce dependency on higher cost deposits while maintaining a strong control on the CASA ratio have helped protect margins. 50 per cent of the bank’s loan book is linked to MCLR while 30 per cent is linked to repo. This will enable a calibrated progression in margins, particularly as the rate-cycle turns. A controlled growth in international book and distinct focus on RAM segments will help maintain healthy portfolio yields and limit margin contraction. We, thus, estimate NIM to moderate 19bp over FY26," it said.