Increasing Financial Penetration Will Boost India's Banking Prospects

Key Takeaways

• Strong momentum in retail, agriculture, and MSME lending, paired with effective risk management, drives sustainable growth and supports profitability improvement.
  
• Focus on deposit mobilization, digital expansion, and international business diversification bolsters earnings resilience and operational efficiency.
  
• Profitability faces pressures from squeezed margins, weak fee income, reliance on trading gains, credit risks, and lagging digital transformation compared to more agile competitors.

Catalysts

Provides various banking products and services to individuals, government departments, and corporate customers in India and internationally.

• Strong growth in retail, agriculture, and MSME lending segments (organic retail book up 17.5%, agriculture up 16.2%, MSME up 13.1%) demonstrates that the bank is capitalizing on rising income levels and increasing financial penetration among India's expanding middle class, which is likely to drive sustainable revenue growth in coming years.
  
• Continued focus on deposit franchise, with total deposits up 9.1% and industry-leading CASA ratio (39.33%) and low cost of deposits (5.05%), positions the bank well to benefit from increasing economic formalization and urbanization, supporting net interest margin and earnings resilience as more savings enter formal banking channels.
  
• Asset quality remains strong and improving (GNPA 2.28%, net NPA 0.6%, provision coverage over 93%), reflecting effective risk management and NPA resolution; this positions the bank to keep credit costs low and support medium-term net margin and profitability improvement.
  
• Upcoming benefits from deposit repricing (70–80% of deposits to reprice by September, expected cost of funds reduction of 15–17bps) alongside digital and branch expansion (planned 15,000 new hires, 300 new branches, investments in digital/technology) suggest forward momentum in both operational efficiency and core earnings.
  
• The bank's international business (global advances up 13.6%, international deposits up 14.8%) and strong ability to weather temporary setbacks (secured resolution underway on large NPA, with potential write-back) allows it to tap into rising cross-border trade and remittance flows, supporting future fee income and diversification of revenue streams.

Bank of Baroda Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bank of Baroda's revenue will grow by 9.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 30.3% today to 27.7% in 3 years time.
• Analysts expect earnings to reach ₹232.1 billion (and earnings per share of ₹44.31) by about July 2028, up from ₹194.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹295.1 billion in earnings, and the most bearish expecting ₹199.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.0x on those 2028 earnings, up from 6.4x today. This future PE is lower than the current PE for the IN Banks industry at 12.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.58%, as per the Simply Wall St company report.

Bank of Baroda Future Earnings Per Share Growth

Risks

• The bank's net interest margin (NIM) is under sustained pressure due to rapid industry-wide loan repricing in a falling rate environment and slower deposit cost moderation, which may continue compressing net interest income and profit margins in the near to medium term.
  
• Fee income growth remains sluggish despite management focus, with sub-10% year-on-year expansion; ongoing weakness in non-interest income streams could weigh on total revenue and overall earnings if not reversed.
  
• There is reliance on treasury and trading gains (notably from OMOs) to support current profitability and return on assets (ROA >1%); these gains may not recur amid changing macro and yield curve conditions, increasing vulnerability of future profits if core operations do not offset this.
  
• Slippages, particularly in the international loan book (despite management's reassurances about recovery), and persistent but contained MSME/retail slippages, highlight ongoing credit risk; any deterioration in asset quality, especially from chunky international or legacy NPA accounts, could raise provisioning requirements and depress net profits.
  
• Investments in physical expansion (branch openings, headcount increases) rather than prioritizing digital transformation risk leaving the bank with higher operational costs relative to fast-growing private, digital-first, or fintech competitors, potentially reducing cost efficiency and future earnings growth.

Valuation

• The analysts have a consensus price target of ₹269.818 for Bank of Baroda based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹316.0, and the most bearish reporting a price target of just ₹215.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹838.0 billion, earnings will come to ₹232.1 billion, and it would be trading on a PE ratio of 9.0x, assuming you use a discount rate of 14.6%.
  
• Given the current share price of ₹239.67, the analyst price target of ₹269.82 is 11.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.