BANK OF BARODA In a league of its own BUY :: Edelweiss

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BANK OF BARODA
In a league of its own


Bank of Baroda (BoB) reported PAT of INR 10.2 bn (up 61% Y-o-Y, 19% Q-o-Q), ahead
of our estimate (INR 7.8 bn), aided by robust NII and lower credit costs. Supported by
12bps expansion in global NIMs (domestic NIMs up 19bps) and strong loan book
growth (30% Y-o-Y, 4% Q-o-Q) NII came in at INR 20.4 bn (up 47% Y-o-Y, 9.7% Q-o-
Q) ahead of our estimate (INR 19.4 bn). Other income, ex-treasury, grew 20.3% Y-o-Y
and 17% Q-o-Q led by strong tractions in commission, exchange, and brokerage.
Incremental slippages declined to 62bps, beating its own impeccable track record,
facilitating credit costs at a low of 31bps during the quarter. Staff expenses grew 10%
Y-o-Y and 14% Q-o-Q to INR 6.5 bn, slightly on the higher side given the fact that
management is yet to provide for the second pension option. Impressive accretion on
low-cost deposits continues with 28% Y-o-Y and 7% Q-o-Q growth in CASA.
􀂃 Incremental slippages <1%
BoB’s slippages during the quarter came in low at INR 2.9 bn (0.62%) against
INR 6.7 bn (1.5%) in the previous quarter, a big positive. Slippages in the
restructured book touched INR 5.4 bn (9.9% of the restructured book) by the
quarter end. Credit costs declined to 31bps (lower than peers) against 63bps in
the previous quarter. Management reiterated that NPL recognition was carried
out through the CBS system against peers, where manual dependence/discretion
is high, another differentiator for the bank. Gross NPL and net NPLs grew
marginally at ~2% to 1.4% and 0.4%, respectively; provision coverage adjusted
for write offs stood at 86%. Incrementally, INR 3.1 bn (0.2% of advances) got
restructured during the quarter. Also, since most restructuring was done in
FY08-09, most restructured advances have crossed one year period, establishing
a good track record. Stressed assets (restructured assets + GNPLs) were at
4.2% of loans, well below the peer group (6%). We are revising cost of credit
estimate down to 52bps against 63bps earlier, providing it enough cushion to
absorb any opex required to meet retirement costs.

􀂃 Outlook and valuations: Good bet; maintain ‘BUY’
Once again, BoB delivered on core performance as quality of earnings improved
on the back of robust margins, steady business expansion, and lower NPL
formation, beating peers by a margin. On back of higher NII and lower credit
costs we are revising up our EPS estimate for FY11 by 18% and for FY12 by 2%
despite the high retirement provisions that the bank needs to make. We like the
bank for its franchise, balance sheet strength, improving metrics, and strong
management. We believe operating and capital leverage will support RoE at 24%
plus. We are building in 20% CAGR in earnings and 30% PPOP growth over
FY10-12E. The bank is trading at 1.9x FY12E adj. book and 8.4x earnings. We
maintain ‘BUY/ Sector Outperformer’ recommendation/rating on the stock.