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Bank of Baroda
Capital infusion could damage ROEs; rising RWA/loans, falling RORWAs:
BOB’s RWA/loan ratio has expanded from 89% in Mar-10 to 96% in Sep-10,
partially due to 40% y/y growth in SME credit. This could put pressure on Tier 1
CARs and lead to the bank raising equity – this represents a significant risk to our
20%+ ROEs.
Asset quality – could there be a catch-up? Asset quality has held up relatively well
for Bank of Baroda with <50bps of credit costs in 1H10.
near term, though ~40bp credit costs is clearly not sustainable.
• BOB’s US$200mn exposure to Dubai has been recognized as an NPA by SBI and
represents a risk. Management maintains that they have been servicing interest on
due dates, and there is no imminent bullet repayment so the risks seem to be low.
International business: susceptible to rising rates: International exposure
constitutes 25% of total loan book and has been a drag on overall margins in FY10.
Margins have improved over the last 2 quarters in the international book due to rising
yields, but a tightening in global liquidity represents a risk for this book on three
fronts: a) margins due to rising cost of funds, b) growth as the arbitrage between
rupee and dollar rates would narrow, and c) asset quality as some of the midcorporates
may not be able to service loans at higher rates.
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