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BANK OF BARODA
Structural rerating to continue; quality deserves premium
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.
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.
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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