Bank of Baroda -2Q11 Results: Strong Performance, But so are Valuations ::Citi

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Bank of Baroda (BOB.BO)
2Q11 Results: Strong Performance, But so are Valuations
 2Q11 profits up 61% yoy; strong growth and operating profitability — BOB’s 2Q11
profits were up a strong 61% yoy, well ahead of estimates and led by strong loan
growth, higher net interest margins and lower loan loss charges. Operationally, it
was yet another strong quarter (pre-provisioning profits ex-trading gains up 70%
yoy), performance was broad-based across all income (and balance sheet)
components and rightly makes BOB stand tall amongst peers.
 P&L: Better NIMs, healthy fee growth; though operating costs should increase —
BOB’s NIMs continued to improve (up 12bps qoq) to over 300bps in 2Q11; its
domestic NIMs are even higher and at 362bps, well ahead of most peers. We see
some moderation ahead as higher funding costs catch up. Fee income growth has
re-accelerated in 2Q (lagged in 1Q) and +25% yoy is largely in-line with credit
expansion. However, BOB has still not started providing for pension costs
(management expects to fix the liability in 3Q) and will need to be watched.
 Balance Sheet: Strong growth, quality and funding — BOB’s loans have expanded
30% yoy (well above industry), is fairly broad-based, though there is higher growth
in the SME segment (possibly higher risk as well). For now though, those risks are
not visible and delinquencies remained low at 1% levels (management believes
sustainable). Loan loss coverage at 86% is also amongst the best in the industry.
The funding franchise also pulled above its weight with domestic CASA ratio at
36% (but relatively higher NIMs).
 Raising earnings, target price, but stock performance limits upsides — We raise
our target price to Rs950, factoring in higher loan growth, NIMs and earnings (+9-
12% over FY11-13E). We now benchmark BOB at par with other large PSU banks
(1.7x FY12E P/BV) given its higher growth, return profile and strong asset quality.
However, we believe the stock is already reflecting these (up 103% in 12 months),
w hich limits upsides from current levels. Maintain Sell (3M) recommendation.