Bank of Baroda investors need to look beyond good Q4 biz update

Bank of Baroda investors

On Tuesday, shares of Bank of Baroda (BoB) went up by about 3%. Investors are happy with the bank’s business update for the March quarter (Q4FY23), which showed that the bank is likely to end FY23 on a good note.

The bank’s loans grew by 19% year-on-year (y-o-y) to 9.74 trillion in the fourth quarter. 82% of all loans went to people in the same country, and they grew at a slower rate of 16.9%.

Within this, retail advances grew at a faster rate of almost 27% year over year and made up 22% of domestic advances. Also, BoB’s total deposits were up 15.1% y-o-y.

As liquidity gets tighter, banks are scrambling to get deposits to meet the demand for loans, and this trend is likely to continue.

As Nitin Aggarwal, head of BFSI research, institutional equities, Motilal Oswal Financial Services said, “Compared to many other banks that have released their Q4 updates so far, BoB has fared better on CASA and overall deposit growth. The same pattern of deposit growth compared to peers is likely to continue in FY24.

Since loan prices change more quickly than deposit prices, the bank’s net interest margin (NIM) could get a boost in Q4. Analysts at JM Financial Institutional Securities Ltd say that public sector banks, such as BoB, have a larger share of their portfolios with floating rates.

In their Q4 banking sector preview report dated 5 April, the analysts said, “We expect margins to remain healthy given continued repricing of MCLR-linked loans.”

Against this backdrop, BoB’s net interest margin could improve marginally in Q4.

But all is not hunky dory. NIMs of banks usually get squeezed when the cost of funds goes up.

So, this is a key thing for investors to keep an eye on in FY24. Also, since deposit rates are going up to meet the demand for credit, NIMs in the banking sector are likely to go down. Also, the slowing of credit growth is likely to put pressure on net interest income and net interest margins (NIMs).

“BoB’s loan growth is likely to slow down in FY24, going from 19% in FY23 to 15-16% in FY24. The bank’s NIM is likely to slow down in the second half of FY24,” said Aggarwal.

BoB’s diversified portfolio mix has helped loan growth in FY23, and it should continue to do so in the future. A good amount of optimism seems to be taken into account by investors. Still, the stock price has gone up by 42% in the last year.

Source: Team CurrencyVeda