Bank of Baroda - Robust performance in earnings & asset quality - BUY :: Emkay

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Bank of Baroda

Robust performance in earnings and asset quality

BUY

CMP: Rs 1,011                                       Target Price: Rs 1,160

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n     BOB’s Q2FY11 net profit at Rs10.2bn was far ahead of our expectations driven by better than expected NII and lower than expected provisions

n     The slippages were extremely positive surprise at just Rs2.9bn (0.6% annualised). Consequently, the provision requirement was also down

n     No provision for pensions was the only negative surprise in the results. However, we believe that with strong revenue traction, BOB can easily provide upto Rs2bn/quarter for same

n     Expect strong performance to continue on better NPA ratios, strong RoEs and inexpensive valuations at 2.4x FY11E/1.9x FY12E ABV. Maintain BUY with TP of Rs1,160

Strong NII growth with better margins…

BOB’s NII for Q2FY11 has grown by 9.7% qoq to Rs20.4bn. The strong growth in NII

was driven by 29% yoy (4.0% qoq) growth in advances and 12bps qoq expansion NIMs.

The expansion in NIMs was driven by better yield on advances.

…And strong advances growth

BOB’s advances for the quarter have grown by 4.0% qoq driven by strong growth in

retail and large corporate segment.

Core operating profit grows by 11% qoq; but not providing for pension

The strong growth in NII coupled with stable expenses resulted in 8.4% qoq growth in

operating profit notwithstanding unfavourable base effect of trading gains. In fact, the core

operating profit grew by stronger 11% qoq for Q2FY11.

However, BOB has not started providing for the pension liabilities under the new pension

scheme. Nonetheless, we believe that the strong traction in BOB’s revenues can easily

meet provisions of upto Rs2bn/quarter. The management has not given any guidance on

the probable pension liabilities.

Provisions come down sharply with lower slippages

The provisions came down sharply during the quarter (almost half qoq) as the slippages

surprised positively at very low number. Since, there were also write back of depreciation

on investments during the quarter, the total provisions stood at just Rs1.9bn.

Sharply lower slippages – a positive surprise

The slippages for the quarter stood sharply lower at Rs2.9bn (0.6% annualized) during the

quarter. While we are positively surprised by this number, we have built in full year

slippages of 1.0% for FY11.

Valuations and view

The stock is currently quoting at 2.4x FY11E ABV and 1.9x FY12E ABV with attractive

average RoEs of 23.5%. We believe that the valuations are not unreasonable looking at (1)

strong returns profile and (2) better NPAs profile than peers. We maintain our

ACCUMULATE rating on the stock with price target of Rs1160.