Bank of Baroda Faces Margin Headwinds: Can FY2026 Bring Relief?

Bank of Baroda (BOB), India’s third-largest public sector bank, has issued a cautious outlook for its fiscal year 2026 (FY26), with CEO Debadatta Chand warning that net interest margin (NIM) pressures will persist through the first two quarters of the year. This follows a downward revision of its FY25 NIM guidance to 3.0-3.1% and a multi-quarter decline in NIM to 2.86% in Q4 FY25, driven by rising deposit costs and strategic shifts in lending.

The bank’s margin challenges stem from a perfect storm of structural and cyclical factors. Here’s a breakdown of what investors need to know:

The Margin Squeeze: What’s Driving the Pressure?

1. Deposit Costs Outpace Loan Yields
   The cost of deposits rose to 5.33% in Q4 FY25, up from 5.11% a year earlier, while the yield on advances fell to 8.35%—a narrowing spread that directly compresses NIM. This trend is unlikely to reverse soon, as competitive pressures in the deposit market and sticky inflation keep interest expenses elevated.

1. Strategic Shift to Lower-Yielding Loans
   BOB has deliberately slowed growth in high-yield segments like personal loans (24% YoY growth vs. a prior target of 30-35%) and NBFC advances, prioritizing asset quality over margin-enhancing opportunities. Instead, the bank is focusing on retail, agriculture, and MSME (RAM) loans, which now account for 59.9% of total advances (up from 57% a year ago). While this improves credit quality (gross NPAs fell to 2.26% in Q4 FY25), it dilutes NIM.

2. Deposit Growth Constraints
   Domestic deposits grew only 9.2% YoY in FY25, lagging loan growth of 12.8%. The bank’s CASA ratio (low-cost current/savings deposits) improved to 39.7%, but reliance on bulk deposits remains a risk. A higher credit-deposit ratio (CD) of 84% globally and 80% domestically underscores liquidity strains.

Key Financial Metrics and Analyst Reactions

• Profitability:
• Standalone PAT rose 3% YoY to ₹5,048 crore in Q4 FY25, but this was driven by non-interest income (up 24% YoY) and lower provisions. Core NII fell 7% YoY to ₹11,020 crore.

• Analysts were split:

  • Motilal Oswal downgraded to Neutral, citing margin risks and a high CD ratio.
  • JM Financial called the 0.7x FY2027 book value valuation attractive but warned of margin drag.
  • Axis Securities trimmed its target price to ₹280 but kept a Buy rating, arguing asset quality improvements offset near-term pain.

• Margin Outlook:

• BOB aims to stabilize NIM at 3.0-3.1% for FY26, but CEO Chand admitted pressures will persist until at least Q2 FY26. Analysts like Emkay Global predict further NIM contraction to 2.9% in Q1 FY26.

Investment Considerations for FY2026

1. Near-Term Risks
2. Deposit Cost Volatility: Rising rates or competitive pricing could push deposit costs higher.
3. Loan Growth Sustainability: RAM loans (now 60% of portfolio) offer stability but lower yields.

4. Bulk Deposits: Reliance on costlier term deposits may strain margins further.

5. Long-Term Opportunities

6. Asset Quality: Gross NPAs at 2.26% are near five-year lows, reducing provisioning drag.
7. CASA Focus: The bank’s push to boost CASA to 40-42% by FY26 could reduce interest expenses.
8. Non-Interest Income: Growth in fee-based revenue (up 24% YoY in Q4) highlights diversification potential.

Conclusion: Navigating the Crosswinds

Bank of Baroda’s margin challenges are real and likely to linger through Q2 FY26, with NIMs potentially hitting 2.8-2.9% before stabilizing. However, the bank’s strong asset quality (GNPA at 2.26%) and strategic pivot to safer loans offer a foundation for recovery.

Investors should weigh two factors:
1. Valuation: BOB trades at 0.7x FY2027 book value, a discount reflecting margin concerns. This could narrow if NII stabilizes or CASA growth accelerates.
2. Margin Turnaround: A rebound in NIM would require either deposit cost containment (e.g., CASA improvements) or yield pickup in loans. Analysts note that even a 10 bps NIM improvement could boost PAT by 5-7%.

The stock’s 10% post-earnings decline to ₹224 highlights investor skepticism, but patience may pay off. For now, BOB remains a hold for most investors, with upside contingent on margin stabilization and deposit cost relief.

As FY26 unfolds, the bank’s ability to balance growth, liquidity, and profitability will determine whether it can turn the tide—or stay adrift in margin headwinds.

Final Take:
Bank of Baroda’s margin pressures are a short-term reality, but its strong balance sheet and improving asset quality provide a runway for recovery. Investors should monitor CASA growth and deposit cost trends closely in Q1 FY26. While risks remain, the stock’s low valuation offers potential for long-term gains if management executes its strategy.