Emkay: Bank of Baroda Q3FY11; Superb performance; Target: Rs 1,160: Emkay

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Bank of Baroda

Superb performance

BUY

CMP: Rs 835                                        Target Price: Rs 1,160

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n     BOB’s Q3FY11 net profit at Rs10.7bn was ahead of our/street expectations driven by better than expected NII and lower than expected provisions for pension liability

n     The slippages were extremely positive surprise at just Rs2.4bn (0.5% annualised). The management has guided that the slippages will not show any sharp movement in future

n     The bank’s second pension liability came in at Rs20.6bn to be amortised over five years. The bank provided Rs3.1bn over 9MFY11 (Rs1.8bn in Q3FY11)

n     Building in 20bps contraction in NIMs but lower provisions and cost ratios will mitigate the negative impact. Valn at 1.7x/1.4x FY11/FY12E ABV not unreasonable. Maintain BUY

Strong NII growth with better margins…

BOB’s NII for Q3FY11 has grown by 12.5% qoq to Rs22.9bn. The strong growth in NII

was driven by 7.4% qoq growth in advances and 18bps qoq expansion NIMs. The

expansion in NIMs was driven by better yield on advances and controlled cost of funds.

…And strong advances growth

BOB’s advances for the quarter have grown by 7.4% qoq driven by strong growth in

SME and Retail advances.

NIMs can be maintained with low domestic CDR

BOB’s domestic CDR was at just 71% for Q3FY11. BOB has also revised its BPLR/Base

rate upwards by ~50bps in December 2010. We believe that these two together will more

than offset the rise in the cost of funds going forward and help sustain the NIMs at current

levels.

CASA just marginally down despite higher advance growth

The domestic CASA mix declined by just about 78bps qoq to 35.1% despite a strong 7.4%

qoq growth in advances.

Overall fee income growth remains strong

The overall fee income (core fees+forex+others) has grown by 16.5% yoy for Q3FY11 and

17% for M9FY11. We believe that the lower quarterly number could be because of the

lumpiness in the core fees and also because BOB had waived the processing fees on home

loan during Q3FY11. The processing fees on home loans have been restored to 0.5% in

Q4FY11 and will help boost the fee income.

Core operating profit grows by 13.5% qoq

The strong growth in NII coupled with controlled expenses resulted in 11.7% qoq growth in

operating profit notwithstanding unfavourable base effect of trading gains. In fact, the core

operating profit grew by stronger 13.5% qoq for Q3FY11.

The bank will be providing in total Rs20.6bn for second pension liabilities to be amortised

over five years. The bank provided Rs3.1bn over 9MFY11 (Rs1.8bn in Q3FY11). We

believe that this liability is after setting of some excess provisions done in the past and the

gross liability would have been ~Rs26-27bn.

NPA provisions accelerated despite lower slippages

The provisions for the quarter were higher at Rs3.0bn led by substantial rise in investment

deprecation and increase in NPA provisioning. We like the fact that BOB has not

decelerated its NPA provisions despite lower slippages for the year.

Slippages continue to trend down

The slippages for the quarter stood lower at Rs2.4bn (0.5% annualized) during the quarter.

While we are positively surprised by this number, we have built in full year slippages of

0.8% for FY11.

Robust capital adequacy

BOB’s tier I capital adequacy ration including M9FY11 net profit was at 9.2%. Looking at

robust tier I CAR, the bank wouldn’t need any new capital for at least 18-24 months for

funding its growth.

Valuations and view

The stock is currently quoting at 1.7x FY11E ABV and 1.4x FY12E ABV with attractive

average RoEs of 23.5%. We believe that the valuations are attractive looking at (1) strong

returns profile and (2) better NPAs profile than peers. We have built in NIM contraction of

20bps for FY12E. However, we believe that lower requirement for provisions and cost

improvements will help BOB to sustain its RoAs at current levels. We maintain our BUY

rating on the stock with price target of Rs1160.