Bank Of Baroda Q2 FY26: Profit Dips Despite Strong NII Growth as Provisions Surge

The quarterly performance presents a mixed narrative for Bank Of Baroda. While the bank demonstrated commendable operational strength with net interest income hitting an all-time high of ₹11,953.61 crores, the profit trajectory was constrained by provisions and contingencies that surged to ₹1,232.47 crores in Q2 FY26. The sequential recovery in profitability from Q1 FY26's disappointing quarter offers some relief, but the year-on-year decline highlights the challenges facing India's public sector banking space amid normalising credit costs and competitive pressures on margins.

With a market capitalisation of ₹1,42,471 crores and trading at a price-to-book value of just 1.01x, Bank Of Baroda remains one of the most attractively valued franchises in the Indian banking sector. The stock has delivered a stellar 88.36% return over three years and an extraordinary 568.19% over five years, significantly outperforming the Sensex and establishing itself as a long-term wealth creator despite near-term headwinds.

Financial Performance: Core Income Shines, Provisions Weigh

Bank Of Baroda's Q2 FY26 financial performance showcased the inherent strength of its core banking operations, even as elevated provisioning requirements tempered overall profitability. Interest earned climbed to an all-time high of ₹31,510.81 crores, marking a 1.35% sequential increase and a 4.07% year-on-year expansion. This growth was primarily driven by robust loan book expansion, with advances reaching ₹12,09,557.90 crores as of March 2025, reflecting a healthy 13.49% year-on-year growth trajectory.

The bank's net interest income (NII) demonstrated impressive momentum, surging 4.54% quarter-on-quarter to ₹11,953.61 crores—the highest quarterly NII in the bank's recent history. This sequential acceleration was particularly encouraging given the challenging interest rate environment and intense competition for quality assets. On a year-over-year basis, NII expanded by 2.72%, indicating sustained pricing power and disciplined liability management despite margin pressures across the banking sector.

However, total income for Q2 FY26 contracted by 2.07% sequentially to ₹35,025.76 crores, primarily due to a sharp 24.81% decline in other income from ₹4,674.53 crores in Q1 FY26 to ₹3,514.95 crores. This volatility in non-interest income—which comprised 10.03% of total income in Q2 FY26—reflects the lumpy nature of treasury gains, fee income, and other non-core revenue streams. Year-over-year, total income declined by 1.18%, underscoring the headwinds from normalising fee income and treasury performance.

The profit trajectory was significantly impacted by provisions and contingencies, which stood at ₹1,232.47 crores in Q2 FY26. While this represented a welcome 37.34% sequential decline from the elevated ₹1,966.94 crores in Q1 FY26, provisions remained substantially higher than the ₹1,010.67 crores recorded in Q2 FY24. This elevated credit cost environment reflects the bank's proactive approach to recognising potential stress in specific loan segments, even as overall asset quality metrics continue to improve.

Operating profit before provisions and contingencies declined by 8.02% sequentially to ₹7,575.95 crores in Q2 FY26, down from ₹8,236.47 crores in the previous quarter. Year-over-year, operating profit contracted by 20.06% from ₹9,477.01 crores in Q2 FY24, reflecting the combined impact of margin compression and normalising fee income. This operational performance underscores the challenging operating environment for public sector banks navigating competitive pressures and evolving regulatory requirements.

Profit before tax stood at ₹6,343.48 crores in Q2 FY26, representing a modest 1.18% sequential increase but an 11.17% year-on-year decline. The effective tax rate remained elevated at 24.19%, resulting in a net profit of ₹4,809.39 crores. While the sequential recovery from Q1 FY26's subdued performance offers encouragement, the year-over-year contraction highlights the normalisation of credit costs and competitive pressures that are tempering profitability across India's banking sector.

Asset Quality Excellence: NPAs at Multi-Year Lows

Bank Of Baroda's asset quality metrics continued their impressive improvement trajectory in Q2 FY26, with the gross non-performing asset (NPA) ratio declining to 2.16%—the lowest level in the bank's recent history. This represents a 12 basis point sequential improvement from 2.28% in Q1 FY26 and a substantial 34 basis point year-over-year compression from 2.50% in Q2 FY24. The consistent improvement in gross NPA ratios over the past eight quarters reflects the bank's strengthened credit underwriting standards, proactive recovery mechanisms, and the beneficial impact of economic recovery on asset quality.

Net NPA ratios demonstrated similar excellence, standing at 0.57% in Q2 FY26—a marginal 3 basis point improvement from 0.60% in the previous quarter and flat year-over-year. The bank's provision coverage ratio remained robust at 93.18% in Q1 FY26 (Q2 FY26 data not available), providing a substantial buffer against potential credit losses. This strong provisioning cushion, combined with improving asset quality trends, positions Bank Of Baroda favourably to navigate potential economic uncertainties.

The bank's advances portfolio expanded to ₹12,09,557.90 crores as of March 2025, reflecting 13.49% year-on-year growth from ₹10,65,781.72 crores in March 2024. This healthy loan growth, achieved while simultaneously improving asset quality metrics, underscores the bank's disciplined approach to credit expansion. The advance-to-deposit ratio stood at 78.47%, indicating balanced growth between assets and liabilities while maintaining adequate liquidity buffers.

Deposits grew to ₹14,72,034.85 crores as of March 2025, up 10.25% year-over-year from ₹13,35,136.40 crores. The current account savings account (CASA) ratio stood at 39.33% in Q1 FY26, reflecting some pressure from competitive deposit mobilisation dynamics. While the CASA ratio has moderated from 41.33% in March 2024, it remains healthy relative to sector averages and provides the bank with a stable, low-cost funding base to support margin sustainability.

Capital Strength and Profitability Metrics

Bank Of Baroda maintained a strong capital position with a total capital adequacy ratio (CAR) of 16.54% as of September 2025, comfortably above regulatory requirements of 11.50%. The Tier-1 CAR stood at 14.15%, providing substantial headroom for balance sheet expansion without immediate capital raising requirements. This robust capitalisation positions the bank favourably to pursue growth opportunities while maintaining financial stability.

The bank's return on equity (ROE) stood at 13.84%, reflecting solid capital efficiency despite the near-term profit pressures. While this ROE trails some private sector peers, it represents a significant improvement from historical levels and demonstrates the bank's ability to generate attractive returns for shareholders. The return on assets (ROA) of 1.21% similarly indicates healthy profitability relative to the asset base, positioning Bank Of Baroda amongst the more efficient public sector banks.

The bank's book value per share stood at ₹264.45, with the stock trading at a price-to-book value of just 1.01x. This modest valuation multiple suggests the market is not fully pricing in the bank's improved fundamentals, asset quality transformation, and sustained profitability trajectory. The dividend yield of 3.00%, supported by a recent dividend of ₹8.34 per share, provides an attractive income component for investors while the bank retains sufficient capital for growth.

Industry Leadership: How Bank Of Baroda Compares to Peers

Within the public sector banking landscape, Bank Of Baroda occupies a distinctive position as the second-largest bank by market capitalisation at ₹1,42,471 crores. The bank's valuation metrics present an interesting contrast to its peer group, trading at a price-to-earnings ratio of 7.32x and price-to-book value of 1.01x—both at the lower end of the PSU banking spectrum.

Bank Of Baroda's ROE of 13.84% positions it in the middle of the peer pack, trailing leaders like Canara Bank (17.21%) and Indian Bank (15.67%) but ahead of Punjab National Bank (11.53%). This ROE level reflects the bank's improving profitability profile, though there remains scope for further enhancement through operational efficiency improvements and margin optimisation. The bank's ability to generate mid-teen returns on equity while maintaining pristine asset quality represents a balanced approach to sustainable value creation.

The valuation discount relative to peers like State Bank of India (P/BV of 1.84x) and Indian Bank (P/BV of 1.54x) appears to reflect market scepticism about the sustainability of Bank Of Baroda's profit trajectory given recent quarterly volatility. However, the bank's superior dividend yield of 3.00%—second only to Union Bank of India's 3.16%—provides an attractive income cushion for investors. The combination of low valuation multiples, improving fundamentals, and healthy dividend yield creates a compelling risk-reward proposition for patient investors.

Valuation Analysis: Attractive Entry Point Despite Near-Term Headwinds

At the current market price of ₹278.30, Bank Of Baroda trades at a price-to-earnings ratio of 7.32x based on trailing twelve-month earnings—representing a significant discount to the broader banking sector and even the public sector banking peer group average. The price-to-book value of 1.01x suggests the market is valuing the bank at barely above its stated book value, despite the substantial improvement in asset quality, consistent profitability, and strong capital position.

The bank's PEG ratio of 0.89x indicates that the stock is trading below its growth rate, typically a signal of undervaluation. With a five-year net profit compound annual growth rate (CAGR) of 84.07%, the bank has demonstrated exceptional long-term growth trajectory that is not fully reflected in current valuation multiples. This disconnect between growth delivery and valuation multiples presents an opportunity for investors with a medium to long-term investment horizon.

The stock's 52-week range of ₹190.70 to ₹280.70 shows that current prices are near the upper end of the trading band, just 0.86% below the 52-week high. However, the 45.94% appreciation from the 52-week low demonstrates the strong momentum that has driven the stock higher over the past year. The recent valuation grade change to "Attractive" from "Very Attractive" on October 1, 2025, reflects the stock's appreciation, though it remains favourably valued relative to fundamentals.

Based on the bank's current book value per share of ₹264.45 and considering an appropriate price-to-book multiple of 1.20x to 1.30x for a well-capitalised public sector bank with improving asset quality and mid-teen ROE, a fair value estimate for Bank Of Baroda would be in the range of ₹317 to ₹344. This implies an upside potential of 14% to 24% from current levels, providing a reasonable margin of safety for fresh investors.

Shareholding Pattern: Stable Government Backing with Rising Institutional Interest

Bank Of Baroda's shareholding pattern reflects the typical structure of a government-owned public sector bank, with the President of India maintaining a stable 63.97% promoter holding across the last five quarters. This unwavering government ownership provides strategic stability and implicit sovereign backing, key factors that differentiate public sector banks from their private sector counterparts in terms of perceived safety and systemic importance.

The most notable trend in recent quarters has been the steady increase in mutual fund holdings, which rose from 9.17% in March 2025 to 10.04% in September 2025. The 71 basis point sequential increase from June to September 2025 signals growing conviction among domestic institutional investors about the bank's improving fundamentals and valuation attractiveness. With 40 mutual fund schemes holding positions in the bank, there is broad-based institutional participation rather than concentrated holdings.

Foreign institutional investor (FII) holdings rebounded to 8.71% in September 2025 from 8.08% in the previous quarter, reversing the declining trend observed in earlier quarters. This 63 basis point sequential increase suggests renewed international investor interest in Indian public sector banks, possibly driven by improving asset quality metrics and attractive valuations. The presence of 661 FII accounts holding Bank Of Baroda shares indicates widespread international participation.

Insurance company holdings declined marginally to 7.41% in September 2025 from 8.07% in June 2025, representing some profit booking after the stock's strong run. Similarly, non-institutional holdings decreased to 8.31% from 8.89%, suggesting retail investors may have trimmed positions near 52-week highs. Despite these marginal declines, total institutional holdings (FII + MF + Insurance + Other DII) stood at a robust 27.72%, providing strong institutional support for the stock.

Stock Performance: Exceptional Long-Term Wealth Creation

Bank Of Baroda's stock performance over various timeframes presents a compelling picture of long-term wealth creation, despite periods of near-term volatility. The stock has delivered an extraordinary 568.19% return over five years, massively outperforming the Sensex's 111.89% return by an alpha of 456.30 percentage points. This exceptional performance reflects the bank's transformation from a stressed balance sheet to a well-capitalised, profitable franchise with pristine asset quality.

The three-year return of 88.36% with an alpha of 50.18 percentage points demonstrates sustained outperformance through multiple market cycles. This period encompasses the post-pandemic recovery, the bank's asset quality improvement journey, and the broader re-rating of public sector banks. The consistent alpha generation across timeframes validates the bank's fundamental transformation and the market's recognition of improved business quality.

Recent momentum has been particularly strong, with the stock delivering 17.01% returns over three months compared to the Sensex's 3.39% gain—an alpha of 13.62 percentage points. The one-month return of 7.18% and one-week gain of 4.49% indicate continued buying interest, likely driven by improving quarterly results and positive technical momentum. The stock is currently trading above all key moving averages (5-day, 20-day, 50-day, 100-day, and 200-day), signalling strong technical strength.

However, the one-year return of 10.79% underperformed the public sector banking sector's 14.40% return by 3.61 percentage points, indicating some stock-specific challenges or profit booking after the strong multi-year run. The stock's beta of 0.44 classifies it as a low-beta stock, meaning it is less volatile than the broader market—an attractive characteristic for risk-averse investors seeking banking sector exposure with lower volatility.

Investment Thesis: Quality Franchise at Attractive Valuation

Bank Of Baroda's investment case rests on four key pillars: attractive valuation, good quality fundamentals, positive financial trends, and bullish technical momentum. The bank's Mojo score of 78 out of 100 and "BUY" rating reflect this balanced assessment across multiple parameters. With a price-to-earnings ratio of 7.32x and price-to-book value of 1.01x, the stock trades at a significant discount to intrinsic value despite demonstrating strong operational performance and asset quality improvement.

The quality assessment of "GOOD" reflects the bank's long-term financial performance, market leadership position in the public sector banking space, and low leverage profile. The bank has delivered an impressive 84.07% CAGR in net profits over five years, demonstrating sustained earnings growth capability. The gross NPA ratio of 2.28% and net NPA ratio of 0.57% position Bank Of Baroda amongst the best-in-class for asset quality in the PSU banking sector.

The short-term financial trend is classified as "POSITIVE" based on several favourable factors including highest-ever quarterly net interest income, lowest gross NPA ratio, and highest interest earned. However, concerns remain around elevated non-operating income as a percentage of profit before tax and declining cash balances. The bank's ability to sustain core income growth while managing credit costs will be crucial for maintaining positive financial trends.

Technical indicators are uniformly bullish, with the stock trading above all major moving averages and displaying positive momentum across weekly and monthly timeframes. The MACD, Bollinger Bands, and KST indicators all signal bullish trends, while the Relative Strength Index (RSI) remains neutral on a weekly basis. The stock's breakout above ₹267 resistance levels opens up further upside potential towards ₹290-300 in the near term.

Key Strengths & Risk Factors

Outlook: What to Watch Going Forward

The path forward for Bank Of Baroda hinges on its ability to sustain core income growth while managing credit costs effectively. The bank's loan book expansion strategy, particularly in retail and MSME segments, will be critical for maintaining NII momentum. Simultaneously, the bank must navigate competitive pressures on deposits without significantly compromising on CASA ratios or funding costs.

Management's focus on operational efficiency and cost management will be crucial for improving return ratios towards peer-leading levels. The bank's digital transformation initiatives and branch network optimisation could provide additional levers for margin expansion. Investors should monitor quarterly trends in operating profit margins, credit costs, and asset quality metrics as key indicators of the bank's ability to deliver sustained earnings growth.