Bank of Baroda - A jewel among PSU banks:: Macquarie

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Bank of Baroda
A jewel among PSU banks
Event
 Earnings 25% above our estimates: BOB reported 2Q net profits of
Rs10.2bn, 25% above our estimate, mainly due to better-than-expected NII
and fees.
 Maintain Neutral; raise TP to Rs1,030: Neutral rating maintained due to
what we regard as rich valuations. We raise our TP by 20% to Rs1,030 due to
increased earnings. Thus, we include higher FY12E RoE and higher initialperiod
earnings growth in our two-stage Gordon growth model.
Impact
 Asset quality – the biggest comforting factor: We think BOB’s ability to
consistently maintain slippages well below industry standards is very
encouraging. At a time when industry averages are hovering at around a 1.5–
2.0% slippage ratio, we see BOB’s slippage ratio, which was 60bp this
quarter, as quite commendable and reflective of the superior credit
assessment standards of the bank. The bank has one of the lowest
restructured asset portfolios at 2.8% of its loan book. Even in terms of an NPL
coverage ratio, BOB’s is 85%, which should act as an excellent cushion.
 Deposit growth and loan growth perfectly matched: Unlike at other banks,
where balance sheets may be stretched and deposit growth is running well
below loan growth, BOB has managed to match its 30% loan growth with a
30% deposit growth, which is quite commendable, in our view.
 We think margins may have peaked: With domestic business NIMs already
at 3.62% (up 20bp QoQ), we think NIMs may have peaked, and with deposit
re-pricing yet to occur, we think NIMs are likely to decline.
 Several other positives to be noted: Fee income growth looked impressive
at 29% and was mainly driven by strong loan growth and good momentum in
the international business. Return ratios have improved from 1Q levels for the
international business.
 Key negative – yet to provide for second option of pension: While other
banks are providing prudently for the second option of pension, BOB has yet
to provide for pensions, and its opex is likely to increase further. We have
factored that into our numbers.
Earnings and target price revision
 We raise our EPS estimates for FY11–13E by 10–20%, mainly due to higher
NII and fees. We raise our TP by 20% to Rs1,030, mainly due to higher
projected earnings growth and a higher FY12E RoE.
Price catalyst
 12-month price target: Rs1,030.00 based on a Gordon Growth methodology.
 Catalyst: Continued stability in asset quality, strong fee income traction.
Action and recommendation
 One of the best-run PSU banks: We believe BOB, which has consistently
delivered on several operational parameters, remains one of the best-run
PSU banks in India. Even so, we maintain our Neutral rating on a valuation
basis.