We downgrade Bank of Baroda to HOLD
(from BUY) as it has surpassed our
previous TP and we believe it looks fully
valued from a FY12 perspective. Our
FY11 & FY12 outlook is detailed below.
Outlook – Our loan-growth estimate is
23% for FY11 and 20% for FY12. We
believe loan growth will be driven by 26%
growth in retail loans and 27% growth in
corporate loans. We expect an average
NIM of 2.8% for FY11 and FY12 on a
blended basis, compared with the 2.6%
reported in FY10. We are factoring in loan
loss provisions of 50bps in FY11 and
40bps for FY12. Our GNPL estimate is 1.6% for FY11 and 1.7% for
FY12.
Our thesis has played out: We have been positive on Bank of
Baroda since our initiation in October 2009. Our recent TP upgrade has
been to INR850 from INR775 on July 2, 2010. The stock has returned
78% YTD compared to 43% from the Bankex and 17% for the broader
market. In the last 3 months, BOB has returned 27% compared to 17%
for the broader market. We believe there are no further significant rerating
catalysts for the stock in the near term and recommend investors
to book profits.
Valuation: Our TP of INR950 is based on a three-stage residual income
model, which includes the following assumptions: risk-free rate of 8%
equity risk premium of 6%, beta of 1.1, terminal growth of 4% and
terminal COE of 10%. At our TP, the stock is valued at 1.8x FY12E
adjusted BV for FY12E adjusted ROE of 23%. Downside risks to TP:
aggressive rate tightening by the RBI and worse than-expected NPLs.
Upside risks: lower-than-expected NPL slippage, higher-than-expected
loan-book growth and continued surge of liquidity into the counter.
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