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BANK OF BARODA 2QFY11: Impressive performance all around; Business growth accelerates; 9% earnings upgrade
BoB's (BOB IN, Mkt Cap US$8.3b, CMP Rs1,011, Buy) 2QFY11 PAT grew 61% YoY (18% higher than estimates) on the back of strong NII growth (7% higher than est) and lower provisions (30% lower than est).
Key highlights
- NII grew 47% YoY (7% higher than est) led by sharp improvement in margins and strong loan growth. Domestic NIM improved 73bp YoY (up 19bp QoQ) to 3.62% and global NIM improved 39bp YoY (up 12bp QoQ) to 3.02%. QoQ increase in margin is impressive considering rise in cost of deposits and fall in CD ratio from 73% to 71.5% for the quarter. Room to expand CD ratio will provide buffer to maintain margins in a scenario of rising cost of liabilities.
- Loans grew 4% QoQ and 30% YoY to Rs1.93t and deposits grew 6% QoQ and 30% YoY to Rs2.70t. CD ratio declined QoQ to 71.6% vs 72.9% (a quarter ago).
- Domestic CASA deposits grew at an impressive rate of 27% YoY and 7% QoQ to Rs739b. Domestic CASA ratio improved from 35.2% a quarter ago to 35.9%.
- Fee income grew 24% YoY and for 1HFY11, it grew 14% YoY.
- Slippages during 2QFY11 stood at Rs3b (0.7% annualized slippage ratio). 1HFY11 slippages stood at Rs9.7b (1.1% annualized slippage ratio). PCR including technical write off stands at 86% (vs 89% a quarter ago). Additional restructuring of Rs1.5b was done during the quarter. Total outstanding restructured books stands at ~Rs54b (2.8% of loan book).
- Provisions during the quarter totaled Rs1.9b of which Rs1.4b was towards NPAs and Rs520m towards standard assets.
Valuation and view
- Comfort on core earnings growth and asset quality remains one of the highest in the sector. The performance on core operating parameters like 1) margins 2) fee income growth 3) CASA growth and 4) asset quality is commendable. RoAs have improved from an average of 0.85% from FY99-08, to 1.1% in FY09 and 1.2% in FY10 led by strong improvement in key operating parameters.
- On back of better than expected core operating profitability and lower than expected slippages, we have upgraded our earnings estimates by 9% each for FY11/12. We expect the bank to report RoA at ~1.3%. RoE from an average of 15% over FY99-08, has improved to 21% in FY09 and 24% in FY10; we expect RoE to be ~25% over FY10-12.
- Stock trades at 1.8x FY12E BV and 7.9x FY12E EPS. Maintain Buy with revised target price of Rs1,140 (2x FY12 BV of Rs569), upside of 12.5%.
Business growth remains strong, CASA ratio at ~36%
- Loans grew at 30% YoY and 4% QoQ to Rs1.93t; domestic loans grew 29% YoY and 4% QoQ to Rs1.42t.
- Deposits grew 30% YoY and 6% QoQ to Rs2.70t; domestic deposits grew 28% YoY and 5% QoQ to Rs2.06t.
- Global CASA deposits grew 7% QoQ and 27% YoY. Domestic CASA growth was also on the same lines. Domestic CASA ratio remained improved 35.9% vs 35.2% a quarter ago
QoQ improvment in margins a positive suprise
- On lower base, Global NIMs improved 39bp YoY and domestic NIMs improved 73bp YoY. A positive surprise came from 19bp QoQ improvement in domestic margins and 12bp QoQ improvement in global margins led by improvement in yield on loans and investments despite rise in cost of deposits.
- Global yield on loans improved 23bp QoQ to 8.4%, Yield on investment improved 40bp QoQ to 7.06% whereas cost of deposits increased just 11bp QoQ to 4.5%.
- Domestic yield on loans improved 38bp QoQ to 10.2%, Yield on investment improved 41bp QoQ to 7.24% whereas cost of deposits increased just 18bp QoQ to 5.27%.
Asset quality comfort remains the best
- Gross NPAs increased just 2% QoQ to Rs27.2b; net NPA increased 2% to Rs7.3b. Slippage during the quarter stood at Rs3b (0.7% annualized slippage ratio) and for 1HFY11 it stood at Rs9.5b (1.1% slippage ratio). Reported provision coverage remains comfortable at ~73% (stable QoQ) and including technical write-offs provision coverage ratio stood at 85%+ (stable QoQ).
- BoB has already recognized Rs2.1b amount outstanding under relief scheme as NPA which was fully provided for in 3QFY10.
- Additional restructuring of Rs1.5b was done during the quarter. Total outstanding restructured book stands at ~Rs54b (2.8% of loan book). BoB has lowest restructured assets amongst peer banks. ~10% of the restructured loans have turned into NPA. Large corporates formed ~52%, SME formed ~25%, Retail ~10% and Agriculture loans ~12% of the overall restructured loans.
Fee income growth improved YoY
- Fee income (including forex) grew 23% YoY and 16% QoQ in 2QFY11 to Rs5b. Fees excluding forex grew 24% YoY and 29% QoQ to Rs4b
- Trading profits during the quarter stood at Rs1.1b vs Rs1.2b in 2QFY10 and Rs1.3b in 1QFY11
- Management remains confident of 20%+ growth in fee based income in FY11 and is expecting fee income growth of inline with loan growth.
- While mgmt has started making provisions for pension and gratuity, details are not available. On back of strong NII growth C/Core Income ratio declined from 53% in 2QFY10 to ~41% in 2QFY11 (stable QoQ).
Valuation and view: Maintain Buy
- We expect BoB to report EPS of Rs107 in FY11 and Rs128 in FY12. BV would be Rs468 for FY11 and Rs569 for FY12. RoA would remain one of the best among peers at ~1.3% and RoE at ~25% over next two years.
- Stock trades at 1.8x FY12E BV and 7.9x FY12 EPS. Maintain Buy with revised target price of Rs1,140 (2x FY12 BV), upside of 12%.
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