Bank of Baroda - Positive surprises have become a habit.:: Kotak Sec

Visit http://indiaer.blogspot.com/ for complete details �� ��


Bank of Baroda (BOB)
Banks/Financial Institutions
Positive surprises have become a habit. BOB continued to excel across all business
parameters with earnings growth of 58% yoy, 21% above estimates. NII grew by 42%,
on the back of 30% loan growth and margins of 3%. Slippages were just at 0.7%
annualized, the best so far amongst banks. We increase earnings estimates by 8% in
FY2011E and 5% in FY2012E. The management guides for a RoA of 1.2%+ and RoEs
of about 23-25%. Despite relatively expensive valuations (amongst PSBs) and a strong
outperformance, we remain positive on the stock. BUY with a TP of `1,250.


Outlook on core earnings gets better with every quarter; remains our preferred pick
We maintain our BUY rating on BOB with a target price of `1,250. The bank has consistently been
delivering better than expectations on most operating parameters. Margins further improved to
3% (increased by 12 bps qoq), loan growth ahead of industry (30% yoy) and slippages at just
0.7% is best thus far. The management does not expect pension provisions to make a serious
impact to earnings and highlighted that it has built up sufficient cushions. Over the medium term,
the bank aspires to grow at 25% in loans, with RoAs of 1.3% and RoEs near 25%. We still build
in some conservative earnings and believe that the bank has levers on loan loss provisions and
expenses, even as we increase our earnings by 8% in FY2011E and 5% in FY2012E. The stock
trades at 1.8X FY2012E PBR and 8X FY2012E PER. We retain BUY with a target of `1,250.
Business growth ahead of the industry with deposits and loan growth at 30% yoy
Global loans grew by 29.6% yoy (4% qoq) to `1.93 tn as of September 2010, while domestic
loans grew by 29% yoy and international loans by 30% yoy. Retail loans have grown by 27% yoy
while SME loans (partly due to reclassification) have grown by 41% yoy. Overall deposits grew by
30% yoy to `2.7 tn with domestic deposits growing by 27% yoy to `2.1 tn. CASA in the domestic
business improved by 70 bps qoq to 35.9% in 2QFY11 representing a growth of 27% yoy.

Overall, we are building loan growth at 24% CAGR for FY2011-12E.

NIMs improve 12 bps to 3%; domestic margins improve 19 bps to reach 3.6%

NIMs for 2QFY11 improved by 12 bps to 3% as domestic margins improved 19 bps to reach
3.6%. International margins were stable at 1.3% qoq. Lending yields in domestic margins
improved by 38 bps during the quarter to 10.2% while domestic cost of deposits increased by 18
bps qoq to 5.3%. CD ratio for the quarter was stable at 72%. Net interest income grew by 46%
yoy and 9% qoq to `20.2 bn. The positive impact of higher lending yields was visible but we
expect NIMs to moderate as we move forward as deposit costs steadily increase.