Bank of Baroda: 2Q11: Asset quality resilience; Overweight: JPMorgan

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


Bank of Baroda: 2Q11: Asset quality resilience continues, Maintain Overweight



• Big surprise in 2Q11: Bank of Baroda declared net profit at Rs10.2bn
up 61% y/y, much higher than our and streets expectations of Rs8.5-
8.6bn. Higher margins and lower provisions led to the large earnings
beat. We believe, given the consistency in asset quality, BOB should
trade at premium valuations to other PSU banks (in line with PNB).
• Asset quality holding up better than peers: Bank of Baroda’s asset
quality has been the strongest over the last few qtrs relative to other
large PSU peers. Credit costs for 1H11 for peer banks have been 100bps
v/s 50bps for BOB. Also, NPA recognition for BOB is already system
based, and this eliminates any large negative surprises that have been
seen for some peers.
• Margins surprise, Loan growth strong: NII growth at 47% y/y was
strong given higher than expected loan growth of ~30% y/y and positive
margin surprise. NIMs improved to 3.02% up 10bps q/q with domestic
margins improving by 20bps sequentially. Given the surprise in margins
and loan growth, we increase our estimates 3-5% for FY11-13E.
• What could impact profits going forward? Unlike most peers, BOB is
still not accounting for additional pension, leading to low opex growth.
Also we believe BOB is in a sweet spot currently in terms of asset
quality, and, given strong loan growth especially in the SME category,
we see credit costs to inch up over the FY12-13.
• Maintain Overweight: valuations expensive but premium valuations
for resilient asset quality: We increase our PT for BOB to
Rs1,125/share from (Rs1,025/share) as we increase our Sep-11 PE to
8.5x (8.0x earlier) and upgrade FY11-13E earnings by 3-5%. Relative
valuations are a challenge currently, given the 16% outperformance in
the last month, but superior asset quality performance supports the
premium valuations, in our view. A key risk is higher than expected
credit costs and higher than expected pension liabilities.