Prabhudas Lilladher has reaffirmed its bullish stance on Bank of Baroda (BOB), maintaining a ‘BUY’ recommendation with a revised target price of Rs270 per share. While the bank has weathered a turbulent quarter marked by pressure on net interest margins (NIMs), elevated operating expenses, and a notable miss on fee income, analysts foresee a potential inflection in profitability starting Q3FY26. Investor attention is now sharply focused on the interplay between deposit re-pricing, asset growth strategies, and the bank’s capacity to manage asset quality. Despite recent setbacks, BOB’s compelling valuation, robust capital position, and ongoing branch expansion provide a constructive case for medium-term upside.

Prabhudas Lilladher Stands by ‘BUY’ Recommendation

Prabhudas Lilladher, a prominent institutional research firm, has reiterated its BUY call on Bank of Baroda, pegging the counter’s target price at Rs270, slightly revised down from the earlier Rs275. This move reflects a nuanced approach to the changing interest rate environment and earnings visibility.

Q1FY26 Performance: Underwhelming, But Not Without Silver Linings

Core pre-provision operating profit, adjusted for an IT refund, slumped 12.4% below estimates as the bank faced headwinds on multiple fronts.
Notably, the NIM miss (by 8bps) was driven by lower reported yields from loans and investments. Net interest income (NII) was subdued, and fee income faltered, both exacerbated by a spike in operating expenditure. Nevertheless, trading gains provided some offset, and deposit growth (up 9.1% YoY) was in line, accompanied by a steadier CASA ratio of 33%.

Net Interest Margins: Squeezed Now, Poised for Recovery Ahead

NIMs continued their downward trajectory, dropping by 6-7bps sequentially to 2.9%.
This was largely due to a 12bps dip in loan yields and nearly 19bps contraction in investment yields. The downward pressure may persist into Q2FY26 due to the lagged impact of repo rate cuts on funding costs, but optimism abounds: management expects 70% of deposits to reprice within two quarters. The bank’s guidance for FY26 NIM stands revised at 2.85-3.0%, down from the previous 3.0%.

Asset Growth: Corporate Book Falters, Retail Remains Resilient

The loan book contracted 2% quarter-on-quarter, dragged down by a sharp 10% drop in the corporate segment,
yet overall advances climbed 13.2% YoY—demonstrating the power of the bank’s retail and agricultural portfolios (both up around 2% QoQ). The SME lending book saw a marginal decrease, but remains largely secured, with minimal exposure to unsecured assets. The corporate book is forecast to recover with 9-10% growth in FY26, and management is targeting a RAM (retail, agri, MSME) share of 64-65% over the next 2-3 years.

Deposit Trends and Cost Efficiencies: CASA Erosion, Opex Worries

CASA ratio slipped 73bps QoQ to 32.99% as deposit costs stayed stubbornly high,
forcing management to moderate deposit rate offerings amid a rate-cutting cycle. The bank expects deposit and overall funding costs to cool off by 15-17bps as transmission effects filter through. Meanwhile, operational efficiency remains under scrutiny: operating expenses overshot projections by 2.2%, with management now guiding for opex growth of 10-15% in the next year alongside plans to hire 15,000 employees and open 300 new branches.

Asset Quality: Slippages From Legacy and International Accounts

Gross slippage, at 1.30% (annualized), edged higher by 4bps sequentially due to a mix of domestic and international exposures.
A Rs1bn legacy personal loan account slipped, as did a $50mn (reduced from $80mn) international account, though the bank is optimistic of recovering significant amounts, having provisioned 40% so far. Standard asset provision also increased following auditor-flagged vulnerabilities in the SMA-1/2 pool. Gross NPA declined to 2.28%, with the coverage ratio steady at 74.9%. On the upside, per-quarter recoveries are targeted at Rs7.5bn.

Financial Snapshot: Key Metrics and Outlook

While the recent quarter disappointed, structural fundamentals remain robust:

Valuation: Attractive Multiples, Compelling Upside

Bank of Baroda is trading at an appealing 0.9x FY27E book value and 7.2x earnings,
representing a significant discount to historical averages. The forward price to adjusted book value stands at a modest 0.8x, suggesting limited downside for long-term investors. The recommended target price implies a tangible re-rating potential as profitability metrics recover.

Stock Levels and Investor Takeaways

Current Market Price: Rs243
Target Price: Rs270
52-Week Range: Rs191 – Rs267
Recommendation: BUY

While Bank of Baroda’s immediate-term results reveal a challenging operating landscape, the prospect of margin rebound, healthy retail franchise growth, and prudent asset quality management set the stage for a sustainable turnaround. Investors are encouraged to accumulate at current levels, anticipating a reversion to higher return ratios and valuation expansion as headwinds ease and growth catalysts gain traction.