Bank of Baroda (BOB IN; Mkt Cap USD8.3b, CMP Rs1,011, Buy): Motilal Oswal

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Bank of Baroda (BOB IN; Mkt Cap USD8.3b, CMP Rs1,011, Buy)

Bank of Baroda (BoB) posted PAT growth of 61% YoY in 2QFY11 (18% higher than our estimate) on back of strong NII growth (7% higher than our estimate) and lower provisions (30% lower than our estimate). Key highlights are:

-     NII grew 47% YoY (7% higher than our estimate), led by sharp improvement in margins and strong loan growth. Domestic NIM improved 73bp YoY (19bp QoQ) to 3.62% and global NIM improved 39bp YoY (12bp QoQ) to 3.02%.

-     Sequential increase in margins is impressive, considering the rise in cost of deposits and fall in CD ratio from 73% to 71.5% during 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 Rs2.7t.

-     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 in 2QFY11 and 14% YoY in 1HFY11.

-     Slippages during 2QFY11 were Rs3b (0.7% annualized slippage ratio). Slippages for 1HFY11 were Rs9.7b (1.1% annualized slippage ratio). PCR including technical write-offs is 86% (v/s 89% a quarter ago).

Valuation and view: Comfort on core earnings growth and asset quality remains one of the highest in the sector. Performance on core operating parameters like (1) margins, (2) fee income growth, (3) CASA growth, and (4) asset quality is commendable. On the 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. The stock trades at 1.8x FY12E BV and 7.9x FY12E EPS. Maintain Buy with revised target price of Rs1,138 (2x FY12E BV of Rs569).