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Bank of Baroda - structural rerating to continue; quality deserves premium; visit note; Buy
We recently met Mr. M.D. Mallya, Chairman & Managing Director, Bank of Baroda (BoB), and the bank’s top management team. Their body language was positive which reaffirmed our confidence in the bank’s fundamentals. Management reiterated that margin slide will be marginal given the focus on ALM and asset quality will continue to be superior. It sounded confident that pension liability will not lead to any disproportionate rise in employee cost or hit on earnings. We believe BoB is in a league of its own in terms of superior fundamentals amongst PSU banks and, hence, continue to perceive it as our top pick.
n Strong core operating performance to sustain
Management reiterated its stance of achieving 23-24% credit growth in FY11; however, it stated that credit growth across the system is getting more broad based, which was a positive indicator. It also believes margin slide at the systemic level will be restricted to 20-25bps as banks are currently enjoying pricing power. BoB has raised deposit rates in 2-3 years bucket by 210bps in last six months and PLR/base rates by 100-125bps. This should help arrest the decline in domestic margins (to be maintained at 3.4-3.5%); even in the international market, management is confident of maintaining NIMs at 1.3%.
The bank has an impeccable asset quality track record over the past few quarters—slippages have been pegged at 1.3% on an average compared to more than 2.5-3.0% for the industry. It has remained unscathed primarily because of stringent origination and credit appraisal processes and sounded confident in maintaining asset quality at best-in-class levels. BoB’s exposure to microfinance is INR 1.6 bn (particularly in West Bengal) and telecom funding (around INR 6 bn) is extended to established players where risk is less. NPL recognition is also carried out through the CBS system against peers, where manual dependence/discretion is high, another differentiator.
n Outlook and valuations: Good bet; maintain ‘BUY’
Under the leadership of Mr. Mallya (CMD w.e.f. May 2008) the stock has re-rated from 1.2x to 1.9x (currently at 1.5x). The quality of earnings has improved on the back of robust margins, steady business expansion, and lower NPL formation, beating peers by a margin. We believe quality, resiliency (during turbulent times), improving metrics, and management stability deserve this premium. Government’s recapitalisation plan is likely to be book accretive (of INR 35-40 per share). The stock is trading at 1.5x FY12E adjusted book and 7x FY12E earnings. We maintain ‘BUY/ Sector Outperformer’recommendation/rating on the stock.
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