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Bank of Baroda
F3Q11: Good Numbers
What's Changed
Price Target Rs1,300.00 to Rs1,150.00
% EPS Change F11/12/13 +12%/-7%/-8%
BOB continues to deliver on key metrics of revenue
growth and asset quality. We remain Overweight but
cut our price target to reflect higher bear case
probability and changes to our estimates.
What’s new: BOB reported profit of Rs. 10.7 bn for
QE-Dec-10. Profits were up 5% QoQ and 28% YoY and
compares with our estimate of Rs. 8.9 bn, driven by
better NII progression and lower NPL provisions.
Results highlights: a) Strong volume growth. Loans
grew by 7% QoQ and 33% YoY. Deposits grew by 4%
QoQ and 31% YoY. CASA moved 80 bps lower QoQ to
35.1% b) NIM moved up 18 bps QoQ to ~3.2%. NII grew
by 12% QoQ / 43% YoY. c) Core non-interest income
progression was weak at -6.8% QoQ / +2.8% YoY
d) BOB indicated that the 2
nd
pension option related
liability has been crystallized at Rs. 23.4 bn. They have
started making provisions towards the same. e) New
NPL slippages and credit costs stayed low at Rs2.8 bn
(0.57% of loans, ann.) and Rs2.1 bn (0.41%). Coverage
was stable at 85%.
Remain OW: BOB continues to deliver on key metrics of
revenue growth and asset quality. Core PPOP grew by
11% QoQ and 55% YoY in QE Dec-10. Asset quality
trends remain significantly better than peers. We believe
that current valuations of 8x F2012 P/E and 1.4x F2012
BV are attractive and remain OW.
Reducing price target to reflect higher bear case
probability, estimate changes: We cut our price target
from Rs1300 to Rs1150. We now apply a 20%
probability to our bear case scenario (5% previously) to
factor in increased uncertainty about economic growth
following recent developments with regard to inflation
(we will revisit the weight if macro conditions change).
We have also reduced our earnings estimates to build in
weaker revenue progression in F12/13 on the back of
lower margins and loan growth assumptions.
Target Price Discussion
We arrive at our price target of Rs1150 using a probability
weighted three-phase residual income model – a five-year
high growth period, a 10-year maturity period, followed by a
declining period.
We have raised our earnings estimates for F2011 by 12% and
reduced our earnings estimates by 7% and 8% for F2012 and
F2013 respectively: We are now building in lower revenue
growth into our F12/F13 estimates on the back of lower
margins and loan growth assumptions.
Following are the details of our probability-based valuation
methodology:
a) 20% weight to bear case scenario (vs. 5% previously) to
factor in the increased economic growth uncertainty following
recent developments with regards to inflation. There is a risk
that if inflation were to sustain at higher level for longer, there
may be a disruptive rise in interest rates – hence leading to
asset quality issues. We believe that until inflation
expectations are brought under control, the market is likely to
continue to assign a reasonable probability to this outcome.
b) 20% weight to bull case scenario (vs. 25% previously) to
factor in the potential of stronger than expected economic
growth and better than expected performance of underlying
businesses at BOB.
c) We assign the residual 60% weight to the base case
scenario premised on the fact that we expect economic
growth to remain robust in the coming year. This will help
credit costs to remain stable at current low levels at BOB.
However, in this scenario we build in margin compression for
BOB from current levels as the impact of rising rates will
continue to filter through.
We have reduced our bull case value by 6%, to Rs1455 per
share, and our base case value by 3%, to Rs1225 per share.
Our bear case value is unchanged at Rs620 per share.
We use a cost of equity of 14.1%, assuming a beta of 1.0, a
risk-free rate of 8.1% (current Indian 10-year government
bond yield), and a market risk premium of 6%.
Risks to Our Price Target
Key downside risks to our price target include
slower-than-expected loan growth, sharp compression in
NIMs and significant deterioration in asset quality
(restructured loans slippages).
Upside risks include: fee income being stronger than
expectations and credit costs being lower than expectations
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Bank of Baroda
F3Q11: Good Numbers
What's Changed
Price Target Rs1,300.00 to Rs1,150.00
% EPS Change F11/12/13 +12%/-7%/-8%
BOB continues to deliver on key metrics of revenue
growth and asset quality. We remain Overweight but
cut our price target to reflect higher bear case
probability and changes to our estimates.
What’s new: BOB reported profit of Rs. 10.7 bn for
QE-Dec-10. Profits were up 5% QoQ and 28% YoY and
compares with our estimate of Rs. 8.9 bn, driven by
better NII progression and lower NPL provisions.
Results highlights: a) Strong volume growth. Loans
grew by 7% QoQ and 33% YoY. Deposits grew by 4%
QoQ and 31% YoY. CASA moved 80 bps lower QoQ to
35.1% b) NIM moved up 18 bps QoQ to ~3.2%. NII grew
by 12% QoQ / 43% YoY. c) Core non-interest income
progression was weak at -6.8% QoQ / +2.8% YoY
d) BOB indicated that the 2
nd
pension option related
liability has been crystallized at Rs. 23.4 bn. They have
started making provisions towards the same. e) New
NPL slippages and credit costs stayed low at Rs2.8 bn
(0.57% of loans, ann.) and Rs2.1 bn (0.41%). Coverage
was stable at 85%.
Remain OW: BOB continues to deliver on key metrics of
revenue growth and asset quality. Core PPOP grew by
11% QoQ and 55% YoY in QE Dec-10. Asset quality
trends remain significantly better than peers. We believe
that current valuations of 8x F2012 P/E and 1.4x F2012
BV are attractive and remain OW.
Reducing price target to reflect higher bear case
probability, estimate changes: We cut our price target
from Rs1300 to Rs1150. We now apply a 20%
probability to our bear case scenario (5% previously) to
factor in increased uncertainty about economic growth
following recent developments with regard to inflation
(we will revisit the weight if macro conditions change).
We have also reduced our earnings estimates to build in
weaker revenue progression in F12/13 on the back of
lower margins and loan growth assumptions.
Target Price Discussion
We arrive at our price target of Rs1150 using a probability
weighted three-phase residual income model – a five-year
high growth period, a 10-year maturity period, followed by a
declining period.
We have raised our earnings estimates for F2011 by 12% and
reduced our earnings estimates by 7% and 8% for F2012 and
F2013 respectively: We are now building in lower revenue
growth into our F12/F13 estimates on the back of lower
margins and loan growth assumptions.
Following are the details of our probability-based valuation
methodology:
a) 20% weight to bear case scenario (vs. 5% previously) to
factor in the increased economic growth uncertainty following
recent developments with regards to inflation. There is a risk
that if inflation were to sustain at higher level for longer, there
may be a disruptive rise in interest rates – hence leading to
asset quality issues. We believe that until inflation
expectations are brought under control, the market is likely to
continue to assign a reasonable probability to this outcome.
b) 20% weight to bull case scenario (vs. 25% previously) to
factor in the potential of stronger than expected economic
growth and better than expected performance of underlying
businesses at BOB.
c) We assign the residual 60% weight to the base case
scenario premised on the fact that we expect economic
growth to remain robust in the coming year. This will help
credit costs to remain stable at current low levels at BOB.
However, in this scenario we build in margin compression for
BOB from current levels as the impact of rising rates will
continue to filter through.
We have reduced our bull case value by 6%, to Rs1455 per
share, and our base case value by 3%, to Rs1225 per share.
Our bear case value is unchanged at Rs620 per share.
We use a cost of equity of 14.1%, assuming a beta of 1.0, a
risk-free rate of 8.1% (current Indian 10-year government
bond yield), and a market risk premium of 6%.
Risks to Our Price Target
Key downside risks to our price target include
slower-than-expected loan growth, sharp compression in
NIMs and significant deterioration in asset quality
(restructured loans slippages).
Upside risks include: fee income being stronger than
expectations and credit costs being lower than expectations
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