Bank of Baroda Shares Rise 5% Despite Weak Q2 Results on Beating Expectations and Improved Asset Quality

Bank of Baroda (BoB) reported weak financial results for the second quarter of fiscal year 2026 (Q2FY26). Despite this, its stock price saw a notable increase of approximately 5% on Monday. Analysts believe the stock's rise was driven by the fact that the results managed to exceed the generally low expectations set by the market, potentially leading to upward revisions in earnings estimates by brokerages.

A key positive was the improvement in asset quality, with the slippage ratio (fresh additions to gross Non-Performing Assets) falling by 25 basis points quarter-on-quarter to 0.9%. This also resulted in lower credit costs. However, the bank's core pre-provisioning operating profit (PPoP) declined by 4% year-on-year to ₹5,851 crore. Recoveries from fully written-off accounts also dropped significantly by 80% to ₹493 crore, although the management expects this to rebound to a normal level of around ₹700 crore per quarter.

Net interest income (NII) grew modestly by 2.7% year-on-year to ₹11,954 crore, despite a healthy 12% global loan growth. This sluggish NII growth was primarily due to a compression in net interest margin (NIM), which decreased by 15 basis points year-on-year to 2.96%. Fee income growth also remained a challenge, increasing by only 1% to ₹1,790 crore, indicating the bank is not fully leveraging its business growth to generate fee-based earnings.

Looking ahead, the transition from current Non-Performing Asset (NPA) norms to Expected Credit Loss (ECL) norms, expected from FY28, was a key discussion point. This transition might increase credit costs by 20-25 basis points, potentially affecting profitability and return on assets (RoA). To prepare, BoB has already made a floating provision of ₹400 crore.

Impact: Despite the current headwinds, Bank of Baroda's valuation on FY26 estimates appears inexpensive. It trades at a price-to-adjusted book value of 0.9 times, which is competitive when compared to leading private sector banks trading at over two times their book value.

Difficult Terms: * **PPoP (Pre-Provisioning Operating Profit)**: This is the bank's profit before setting aside money for bad loans (provisions), taxes, and other expenses. It helps understand the bank's core operational profitability. * **NPA (Non-Performing Asset)**: A loan or advance for which the principal or interest payment remained overdue for a period of 90 days. * **Slippage Ratio**: The ratio of new loans that have become NPAs during a quarter to the total loans outstanding at the beginning of the quarter. A lower ratio is better. * **NII (Net Interest Income)**: The difference between the interest income earned by the bank from its lending activities and the interest paid out to its depositors. * **NIM (Net Interest Margin)**: A profitability measure that shows the difference between interest income earned and interest paid out, expressed as a percentage of interest-earning assets. It reflects how profitably the bank is lending. * **RoA (Return on Assets)**: A financial ratio that shows how profitable a company is relative to its total assets. It measures how efficiently the bank uses its assets to generate profit. * **RoE (Return on Equity)**: A profitability ratio that measures how much profit a company generates with the money shareholders have invested. It shows how effectively the bank is using shareholder capital. * **ECL (Expected Credit Loss)**: An accounting framework where banks estimate potential future loan losses over the entire life of the loan, rather than just when a loss event occurs. This typically requires higher provisions.