Bank of Baroda - Continued strong performance:: Goldman Sachs

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Bank of Baroda (BOB.BO)
Buy
Above expectations on core but provisions should have been higher
Continued strong performance
2Q PAT of Rs10.2 bn (up 61% yoy) was 35% ahead of GSe primarily on lower
provisions and higher NII. PBT pre-provisions & trading gains grew 61% yoy,
12% ahead of GSe. Highlights: (1) strong NII at Rs20.4 bn, up 47% yoy (+4%
vs. GSe) buoyed by 20 bp qoq uptick in domestic NIMs to 3.62% (2QFY10:
2.89%, 1QFY11: 3.43%) and 30% yoy credit growth. Management guided for
domestic NIMs of 3.4% and credit growth of 23%-24% yoy in FY11; (2)
employee costs were 5% below GSe as BOB continued to defer pension
liability provisions. Management indicated it has some excess provisions (but
did not quantify), and is awaiting actuarial estimates in November, by which
time employees need to state their preferences. Extrapolating Union Bank of
India’s pension liability (with about 25% fewer employees vs. BOB), implies
pension liability of Rs30-35 bn (built into our estimates over 5 years); (3) loan
loss provisions were 43% lower than GSe at Rs1.9 bn (0.4% of loans vs. 0.7%
in 1Q) as gross NPLs and restructured loans (at Rs54.3 bn or 2.8% of
advances) remained almost stable qoq. Cumulative slippage (in >Rs10 mn
accounts) from restructured loans at Rs5.3 bn (10% of restructured assets);
and (4) core fees up 29% qoq and 24% yoy, indicated on credit related fees.
Reiterate Buy
Reiterate Buy given: (1) reasonable valuations relative to high ROE (22.7%),
earnings growth (20% CAGR) over FY11E-FY13E; (2) low bulk dependence to
likely translate into CASA/NIM preservation; and (3) low total impaired assets
at 4.2% vs. peers at 6%-8%. We raise our CAMELOT based 12-month target
price by 12% to Rs1,010 as we roll forward BVPS by one quarter, and raise our
FY11E EPS by 9% to incorporate higher NII/expenses and lower provisions.
Our implied valuation would be Rs1,110 if it was based on our March 2012E
BVPS. Key risks: MTM hit, limited scope for FIIs to buy.