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Bank of Baroda (BoB) reported PAT of INR 10.7 bn (up 28% Y-o-Y, 5% Q-o-Q),
ahead of our estimate (INR 8.9 bn), aided by robust NII and relatively lower credit
costs. Supported by 18bps expansion in global NIMs (domestic NIMs up 20bps) and
strong loan book growth (33% Y-o-Y, 7.4% Q-o-Q), NII came in at INR 22.9 bn (up
43% Y-o-Y, 12.5% Q-o-Q), ahead of our estimate (INR 20.8 bn). The only weak link
in the result is the modest growth in other income at 2.5%. Incremental slippage
continued at low levels of 80bps, beating its own impeccable track record, facilitating
credit costs at a low of 43bps during the quarter. Staff expenses grew 10% Y-o-Y and
6% Q-o-Q, to INR 6.95 bn, as the bank made INR 1.77 bn provision towards second
pension option liabilities (total liability of INR 20.6bn). Impressive accretion on lowcost
deposits continues with 27% Y-o-Y and 7% Q-o-Q growth in CASA.
�� Incremental slippages <1% once again
BoB’s slippages during the quarter came in lower at INR 3.8 bn (80 bps), well
below the industry average of ~1.5% - a big positive. Slippages in the
restructured book touched INR 5.6 bn (9.3% of the restructured book) by the
quarter end. Credit costs averaged 43bps (lower than peers) against 65bps in
FY10. Management reiterated that NPL recognition was carried out through the
CBS system against peers, where manual dependence/discretion is high -
another differentiator for the bank. Gross NPL and net NPLs grew marginally at
~2% to 1.4% and 0.4%, respectively; provision coverage adjusted for write offs
stood at 86%. Also, since most restructuring was done in FY08-09, majority
restructured advances have crossed the one-year period, establishing a good
track record. Stressed assets (restructured assets + GNPLs) were at 4.2% of
loans, well below the peer group (6%). We are building LLP of ~55bps in FY12,
which will provide the bank enough cushion to absorb any opex required to meet
retirement costs.
�� Outlook and valuations: Good bet; maintain ‘BUY’
Once again, BoB delivered on core performance as quality of earnings improved on
the back of robust margins, steady business expansion and lower NPL formation,
beating peers by a margin. On the back of higher NII and lower credit costs, we
are revising up our EPS estimate for FY11 by 8% and for FY12 by 3%, despite high
retirement provisions that the bank needs to make. We like the bank for its
franchise, balance sheet strength, improving metrics and strong management. We
believe quality, resiliency (during turbulent times), improving metrics and
management stability deserve this premium. We believe operating and capital
leverage will support RoE at 23% plus. The bank is trading at 1.5x FY12E adj. book
and 6.9x earnings. We maintain ‘BUY/ Sector Outperformer’
recommendation/rating on the stock. It remains one of our top picks in the sector
�� Robust top-line; domestic NIMs expanded 20bps
Advances grew 32.7% Y-o-Y and 7% Q-o-Q, to INR 2.07 tn, with increased traction in
both domestic and overseas businesses. Led by 17bps increase in yield on advances and
contained cost of deposits, coupled with 200bps increase in CD ratio (73.6%), domestic
NIMs expanded 20bps Q-o-Q, touching 3.82%, comparing favourably with best-in-class
banks. Higher loan averages during the quarter, along with high NIMs, enabled BoB to
report strong NII of INR 22.93 bn (up 43.5% Y-o-Y, 12.5% Q-o-Q), higher than our
estimate (INR 20.8 bn). Management is confident of maintaining domestic NIMs in the
3.4-3.5% range, going forward.
�� No negative surprise on second pension option obligation
Staff expenses grew 10% Y-o-Y and 6% Q-o-Q, to INR 6.95 bn, as the bank made INR
1.8 bn provision towards second pension option liabilities. Management disclosed that
the company’s second pension option obligation is ~INR 20.6 bn, translating into an
annual hit of INR 4.12 bn. The management once again reiterated that it does not have
any deficit in the gratuity fund.
�� Modest other income performance
BoB’s other income during the quarter registered a muted 2.5% growth due to relatively
lower trading gains (INR 0.85 bn) and lesser recovery from the written-off accounts.
BoB’s core fee income grew at 16% Y-o-Y, largely led by 49% growth in forex fees,
which offset the modest performance on CEB fees. Management expects to grow fee
income in line with balance sheet growth.
�� Business growth better than industry
BoB’s advances in Q3FY11 grew 32.7% Y-o-Y and 7% Q-o-Q, to INR 2.07 tn, with
increased traction in both domestic (31% Y-o-Y) and overseas (37% Y-o-Y, 7.7% Q-o-Q)
businesses. Sequential growth remained strong in SME (7%) and retail at ~9%.
Contribution of housing loans to the overall retail book remained relatively stable at 40%.
Management guided to ~23-24% growth in advances for FY11 (above industry growth).
Supported by sales and market initiatives and improved process flow, the bank was able
to grow both CASA and term deposits. BoB expects to grow its deposits in the 20-22%
range over FY11.
�� Other highlights
• Bank guided for 25% profit growth in FY11.
• During the quarter, the bank took MTM hit of INR 534.5 mn on the investment book
• Tier I stood at 7.7% (above 9%, including profits of 9mFY11)
• AFS book formed 18% of investment book and has duration of 2.48 years
• The bank will add ~4k employees in FY12
• Over the course of the year the bank has made good use of the strong core earnings
to make adhoc provisions of INR3.2 bn (INR 660 mn during the quarter)
�� Company Description
Established in 1908 by Maharaja Sayajirao Gaekwad of Baroda, BoB was one of the 14
banks that were nationalised in 1969. With nearly 3,100 branches within India and over
75 offices abroad, and a balance sheet size of over ~INR 2.7 tn, BoB is amongst the top
5 Indian banks in terms of balance sheet size and third largest amongst PSU banks in
deposit franchise. It has a well-diversified balance sheet within India, while it has
leveraged its international branch network to build a 25% balance sheet from outside
India. It has been one of the early players to have identified the potential and
importance of international presence and is currently operating through its eight banking
subsidiaries apart from the parent.
Since FY06, the bank has charted a new growth strategy under project “Parivartan”,
rebranding itself, energising its century old brand.
�� Investment theme
By virtue of operating and capital leverage and strong recoveries, Bank of Baroda (BoB)
has been able to structurally improve its RoEs from ~13% in FY05-08 to 20% plus in
FY09/10. Opex/assets have declined ~60bps to 1.5% in FY10; there is scope for further
10bps decline in FY11/12, factoring in the lower cost of replacement and better
employee productivity. This, coupled with improvement in net interest income (NII) over
FY11-12, could strengthen return ratios.
�� Key Risks
• Sharper-than-expected decline in net interest margins
• Sharper-than-expected slippage in asset quality
• Pension liability is still uncertain
• International book can throw lumpy slippages
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Bank of Baroda (BoB) reported PAT of INR 10.7 bn (up 28% Y-o-Y, 5% Q-o-Q),
ahead of our estimate (INR 8.9 bn), aided by robust NII and relatively lower credit
costs. Supported by 18bps expansion in global NIMs (domestic NIMs up 20bps) and
strong loan book growth (33% Y-o-Y, 7.4% Q-o-Q), NII came in at INR 22.9 bn (up
43% Y-o-Y, 12.5% Q-o-Q), ahead of our estimate (INR 20.8 bn). The only weak link
in the result is the modest growth in other income at 2.5%. Incremental slippage
continued at low levels of 80bps, beating its own impeccable track record, facilitating
credit costs at a low of 43bps during the quarter. Staff expenses grew 10% Y-o-Y and
6% Q-o-Q, to INR 6.95 bn, as the bank made INR 1.77 bn provision towards second
pension option liabilities (total liability of INR 20.6bn). Impressive accretion on lowcost
deposits continues with 27% Y-o-Y and 7% Q-o-Q growth in CASA.
�� Incremental slippages <1% once again
BoB’s slippages during the quarter came in lower at INR 3.8 bn (80 bps), well
below the industry average of ~1.5% - a big positive. Slippages in the
restructured book touched INR 5.6 bn (9.3% of the restructured book) by the
quarter end. Credit costs averaged 43bps (lower than peers) against 65bps in
FY10. Management reiterated that NPL recognition was carried out through the
CBS system against peers, where manual dependence/discretion is high -
another differentiator for the bank. Gross NPL and net NPLs grew marginally at
~2% to 1.4% and 0.4%, respectively; provision coverage adjusted for write offs
stood at 86%. Also, since most restructuring was done in FY08-09, majority
restructured advances have crossed the one-year period, establishing a good
track record. Stressed assets (restructured assets + GNPLs) were at 4.2% of
loans, well below the peer group (6%). We are building LLP of ~55bps in FY12,
which will provide the bank enough cushion to absorb any opex required to meet
retirement costs.
�� Outlook and valuations: Good bet; maintain ‘BUY’
Once again, BoB delivered on core performance as quality of earnings improved on
the back of robust margins, steady business expansion and lower NPL formation,
beating peers by a margin. On the back of higher NII and lower credit costs, we
are revising up our EPS estimate for FY11 by 8% and for FY12 by 3%, despite high
retirement provisions that the bank needs to make. We like the bank for its
franchise, balance sheet strength, improving metrics and strong management. We
believe quality, resiliency (during turbulent times), improving metrics and
management stability deserve this premium. We believe operating and capital
leverage will support RoE at 23% plus. The bank is trading at 1.5x FY12E adj. book
and 6.9x earnings. We maintain ‘BUY/ Sector Outperformer’
recommendation/rating on the stock. It remains one of our top picks in the sector
�� Robust top-line; domestic NIMs expanded 20bps
Advances grew 32.7% Y-o-Y and 7% Q-o-Q, to INR 2.07 tn, with increased traction in
both domestic and overseas businesses. Led by 17bps increase in yield on advances and
contained cost of deposits, coupled with 200bps increase in CD ratio (73.6%), domestic
NIMs expanded 20bps Q-o-Q, touching 3.82%, comparing favourably with best-in-class
banks. Higher loan averages during the quarter, along with high NIMs, enabled BoB to
report strong NII of INR 22.93 bn (up 43.5% Y-o-Y, 12.5% Q-o-Q), higher than our
estimate (INR 20.8 bn). Management is confident of maintaining domestic NIMs in the
3.4-3.5% range, going forward.
�� No negative surprise on second pension option obligation
Staff expenses grew 10% Y-o-Y and 6% Q-o-Q, to INR 6.95 bn, as the bank made INR
1.8 bn provision towards second pension option liabilities. Management disclosed that
the company’s second pension option obligation is ~INR 20.6 bn, translating into an
annual hit of INR 4.12 bn. The management once again reiterated that it does not have
any deficit in the gratuity fund.
�� Modest other income performance
BoB’s other income during the quarter registered a muted 2.5% growth due to relatively
lower trading gains (INR 0.85 bn) and lesser recovery from the written-off accounts.
BoB’s core fee income grew at 16% Y-o-Y, largely led by 49% growth in forex fees,
which offset the modest performance on CEB fees. Management expects to grow fee
income in line with balance sheet growth.
�� Business growth better than industry
BoB’s advances in Q3FY11 grew 32.7% Y-o-Y and 7% Q-o-Q, to INR 2.07 tn, with
increased traction in both domestic (31% Y-o-Y) and overseas (37% Y-o-Y, 7.7% Q-o-Q)
businesses. Sequential growth remained strong in SME (7%) and retail at ~9%.
Contribution of housing loans to the overall retail book remained relatively stable at 40%.
Management guided to ~23-24% growth in advances for FY11 (above industry growth).
Supported by sales and market initiatives and improved process flow, the bank was able
to grow both CASA and term deposits. BoB expects to grow its deposits in the 20-22%
range over FY11.
�� Other highlights
• Bank guided for 25% profit growth in FY11.
• During the quarter, the bank took MTM hit of INR 534.5 mn on the investment book
• Tier I stood at 7.7% (above 9%, including profits of 9mFY11)
• AFS book formed 18% of investment book and has duration of 2.48 years
• The bank will add ~4k employees in FY12
• Over the course of the year the bank has made good use of the strong core earnings
to make adhoc provisions of INR3.2 bn (INR 660 mn during the quarter)
�� Company Description
Established in 1908 by Maharaja Sayajirao Gaekwad of Baroda, BoB was one of the 14
banks that were nationalised in 1969. With nearly 3,100 branches within India and over
75 offices abroad, and a balance sheet size of over ~INR 2.7 tn, BoB is amongst the top
5 Indian banks in terms of balance sheet size and third largest amongst PSU banks in
deposit franchise. It has a well-diversified balance sheet within India, while it has
leveraged its international branch network to build a 25% balance sheet from outside
India. It has been one of the early players to have identified the potential and
importance of international presence and is currently operating through its eight banking
subsidiaries apart from the parent.
Since FY06, the bank has charted a new growth strategy under project “Parivartan”,
rebranding itself, energising its century old brand.
�� Investment theme
By virtue of operating and capital leverage and strong recoveries, Bank of Baroda (BoB)
has been able to structurally improve its RoEs from ~13% in FY05-08 to 20% plus in
FY09/10. Opex/assets have declined ~60bps to 1.5% in FY10; there is scope for further
10bps decline in FY11/12, factoring in the lower cost of replacement and better
employee productivity. This, coupled with improvement in net interest income (NII) over
FY11-12, could strengthen return ratios.
�� Key Risks
• Sharper-than-expected decline in net interest margins
• Sharper-than-expected slippage in asset quality
• Pension liability is still uncertain
• International book can throw lumpy slippages
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