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Bank of Baroda
Key highlights of 3QFY11 and what can be expected for the rest of FY11
�� Loan book grew by 7.4% q-q and 29% y-y in 3QFY11.This loan growth was backed
by a deposit growth of 31% y-y – CASA deposits grew 23% y-y and term deposits
34% y-y. CASA ratio was 29.1%.
�� NIM expanded by 20bp q-q to 3.2% in 3QFY11, on the back of a flat cost of funds
of 4.5%, while blended yields expanded by 20bp to 8.6%. Net-interest income grew
by a 13% q-q and 43% y-y on the back of this NIM expansion. Non-interest income
was flat both sequentially and y-y.
�� GNPLs were flat sequentially (grew 23% y-y) – GNPL ratio closed at 1.32%. NNPL
ratio closed at 0.36% on the back of a core provision cover of 73% (85.5%
including technical write-offs). Loan-loss provisions for 3QFY11 at INR3b increased
64% sequentially – representing 40bp of average loans.
What the bank needs to achieve in 4QFY11 to meet our expectations
Loans of INR111b will have to be disbursed in 4QFY11 to meet our loan growth
expectation of 24.7% for FY11. We expect NIMs to decline to 2.93% in 4QFY11. We
need to bear in mind the higher incidence of priority sector loans in 4Q (which should
drag loan yields down) and a further pass-through of higher funding costs. We are
keeping LLPs flat q-q at 42bp.
What to expect in FY12
We are budgeting for a loan growth of 20%, NIM of 2.8%, core fee income growth of
24% and a PAT growth of 4% driven by 12bp spike in LLPs. We are factoring in a costincome
ratio of 40% for FY12.
Valuation: We retain our TP for BOB at INR950.00, implying a FY12E P/BV of 1.75x
(earlier 1.8x). The stock trades at 1.5x our FY12E adjusted BV for adjusted ROE of
22.1%. Our TP is based on a three-stage residual income model, which assumes which
assumes a risk-free rate of 8.3%, equity risk premium of 6%, terminal growth rate of 4%
and beta of 1.1. Key risks to TP are: higher-than-expected NIM compression and LLPs.
Accumulate now
�� Upgrade to BUY as we see signs of improving liquidity
�� We factor in NIM compression of 30bp and LLP of 55bp for FY12
�� Valuations look attractive; consistency and management quality
�� Trades at 1.5x FY12E adjusted BV for adjusted ROE of 22%
Why the upgrade now
We are starting to see signs of system
liquidity rising back to more comfortable
levels, which was the primary driver for
our sector downgrade back in October
2010 (see our note, “Time to book profit”
dated 8 October 2010). We expect system
liquidity to correct gradually over the next
2-3 months, as deposit growth has been
inching up on higher deposit rates and
government spending will slowly recycle
government surplus back into the system.
Even after accounting for NIM
compression in FY12 and higher loan-loss
provisions (LLP) on a possible spike in
credit cost, we believe BOB’s price correction has been excessive. Thus,
we upgrade to BUY (from Hold) and retain our target price at INR950.00.
What has changed in the sector and FY12 outlook
We downgraded BOB in October on concerns about a widening gap
between credit growth and deposit growth and, consequently, tight
liquidity in the system driving up funding costs. We have seen this thesis
play out so far, with the loan-to-deposit ratio (LDR) looking very stretched
for all major banks in the system (see Exhibit 3 for BOB’s historical and
incremental LDR). Deposit rates have increased 200-300bp across the
sector and deposit growth has inched up from 14% levels in October
2010 to 16.5% in early January 2011. This deposit traction, together with
the expected increase in government spending, should further ease the
liquidity pressure in the system. In this context, we are building in NIM
contraction for FY12 and increasing our LLP assumption to account for
the possible spike in credit cost. We calculate that BOB will have to
disburse loans of INR111.3b in 4QFY11 to meet our loan growth estimate
of 25% y-y for FY11. This represents q-q loan growth of 5.4% in 4QFY11.
We assume NIM compression of 20-30bp over the next 2-3 quarters. We
factor in LLP of 43bp for FY11, compared to 60bp in FY10. For FY12, we
estimate y-y loan growth of 19.8%, NIM of 2.8%, core fee income growth
of 25%, and LLP of 55bp.
Valuation
We maintain our target price for BOB at INR950.00, implying a FY12E
P/BV of 1.75x (earlier 1.8x). The stock trades at 1.5x our FY12E adjusted
BV for adjusted ROE of 22.1%. Our target price is based on a threestage
residual income model, which assumes a risk free rate of 8.3%,
equity risk premium of 6%, terminal growth rate of 4% and beta of 1.1.
Key risks to our target price are: higher-than-expected NIM compression
and LLP.
The Risk Experts
• Our starting point for this page is recognition of the macro
factors that can have a significant impact on stock-price
performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bank of Baroda
Key highlights of 3QFY11 and what can be expected for the rest of FY11
�� Loan book grew by 7.4% q-q and 29% y-y in 3QFY11.This loan growth was backed
by a deposit growth of 31% y-y – CASA deposits grew 23% y-y and term deposits
34% y-y. CASA ratio was 29.1%.
�� NIM expanded by 20bp q-q to 3.2% in 3QFY11, on the back of a flat cost of funds
of 4.5%, while blended yields expanded by 20bp to 8.6%. Net-interest income grew
by a 13% q-q and 43% y-y on the back of this NIM expansion. Non-interest income
was flat both sequentially and y-y.
�� GNPLs were flat sequentially (grew 23% y-y) – GNPL ratio closed at 1.32%. NNPL
ratio closed at 0.36% on the back of a core provision cover of 73% (85.5%
including technical write-offs). Loan-loss provisions for 3QFY11 at INR3b increased
64% sequentially – representing 40bp of average loans.
What the bank needs to achieve in 4QFY11 to meet our expectations
Loans of INR111b will have to be disbursed in 4QFY11 to meet our loan growth
expectation of 24.7% for FY11. We expect NIMs to decline to 2.93% in 4QFY11. We
need to bear in mind the higher incidence of priority sector loans in 4Q (which should
drag loan yields down) and a further pass-through of higher funding costs. We are
keeping LLPs flat q-q at 42bp.
What to expect in FY12
We are budgeting for a loan growth of 20%, NIM of 2.8%, core fee income growth of
24% and a PAT growth of 4% driven by 12bp spike in LLPs. We are factoring in a costincome
ratio of 40% for FY12.
Valuation: We retain our TP for BOB at INR950.00, implying a FY12E P/BV of 1.75x
(earlier 1.8x). The stock trades at 1.5x our FY12E adjusted BV for adjusted ROE of
22.1%. Our TP is based on a three-stage residual income model, which assumes which
assumes a risk-free rate of 8.3%, equity risk premium of 6%, terminal growth rate of 4%
and beta of 1.1. Key risks to TP are: higher-than-expected NIM compression and LLPs.
Accumulate now
�� Upgrade to BUY as we see signs of improving liquidity
�� We factor in NIM compression of 30bp and LLP of 55bp for FY12
�� Valuations look attractive; consistency and management quality
�� Trades at 1.5x FY12E adjusted BV for adjusted ROE of 22%
Why the upgrade now
We are starting to see signs of system
liquidity rising back to more comfortable
levels, which was the primary driver for
our sector downgrade back in October
2010 (see our note, “Time to book profit”
dated 8 October 2010). We expect system
liquidity to correct gradually over the next
2-3 months, as deposit growth has been
inching up on higher deposit rates and
government spending will slowly recycle
government surplus back into the system.
Even after accounting for NIM
compression in FY12 and higher loan-loss
provisions (LLP) on a possible spike in
credit cost, we believe BOB’s price correction has been excessive. Thus,
we upgrade to BUY (from Hold) and retain our target price at INR950.00.
What has changed in the sector and FY12 outlook
We downgraded BOB in October on concerns about a widening gap
between credit growth and deposit growth and, consequently, tight
liquidity in the system driving up funding costs. We have seen this thesis
play out so far, with the loan-to-deposit ratio (LDR) looking very stretched
for all major banks in the system (see Exhibit 3 for BOB’s historical and
incremental LDR). Deposit rates have increased 200-300bp across the
sector and deposit growth has inched up from 14% levels in October
2010 to 16.5% in early January 2011. This deposit traction, together with
the expected increase in government spending, should further ease the
liquidity pressure in the system. In this context, we are building in NIM
contraction for FY12 and increasing our LLP assumption to account for
the possible spike in credit cost. We calculate that BOB will have to
disburse loans of INR111.3b in 4QFY11 to meet our loan growth estimate
of 25% y-y for FY11. This represents q-q loan growth of 5.4% in 4QFY11.
We assume NIM compression of 20-30bp over the next 2-3 quarters. We
factor in LLP of 43bp for FY11, compared to 60bp in FY10. For FY12, we
estimate y-y loan growth of 19.8%, NIM of 2.8%, core fee income growth
of 25%, and LLP of 55bp.
Valuation
We maintain our target price for BOB at INR950.00, implying a FY12E
P/BV of 1.75x (earlier 1.8x). The stock trades at 1.5x our FY12E adjusted
BV for adjusted ROE of 22.1%. Our target price is based on a threestage
residual income model, which assumes a risk free rate of 8.3%,
equity risk premium of 6%, terminal growth rate of 4% and beta of 1.1.
Key risks to our target price are: higher-than-expected NIM compression
and LLP.
The Risk Experts
• Our starting point for this page is recognition of the macro
factors that can have a significant impact on stock-price
performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process.
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