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Bank of Baroda (BOB)
Banks/Financial Institutions
Focus on consistency and quality maintained. Bank of Baroda delivered yet another
quarter of impeccable earnings, driven by steady loan growth (up 33%), strong deposit
growth (31% yoy), improving margins (up 18 bps qoq) and contained asset quality
(delinquency at 0.6% for 3Q). Credit/deposit ratio at 71% is amongst the best in the
industry and will support strong growth. A focused management continues to deliver
consistent growth, sustaining RoAs at 1.3% and RoEs at 22-24%. Stock trades at 1.5X
FY2012E PBR. Retain BUY.
Quality of earnings maintained with impeccable asset quality; remains our preferred pick
We maintain our BUY rating on BoB with a target price of `1,200. The bank has consistently been
delivering better than expected on most operating parameters. Even in 3Q, margins further
improved to 3.2% (increased by 18 bps qoq), loan growth was ahead of industry (33% yoy) with
slippages at just 0.6%, the best thus far. Even as we believe that the bank might not be able to
sustain these strong numbers on earnings and asset quality, there are enough levers on operating
expenses and provisions from next year to deliver the bank’s stated objective of RoA at 1.3% and
RoEs of 22-24%. We largely maintain our earnings post 3Q earnings. We build in about 20 bps
margin contraction in FY2012E over FY2011E levels. Stock trades at 1.5X FY2012E PBR and 7X
FY2012E PER.
Strong deposit growth provides enough liquidity to sustain strong credit growth
Against industry trends, BoB witnessed a good inflow of deposits (up 29% yoy) making it one of
the few large banks with a very liquid balance sheet (domestic CD ratio at 71% compared to 69%
in September 2010). Overall loans grew by 33% yoy (7% qoq) to `2.1 tn as of December 2010,
while domestic loans grew by 31% yoy and international loans by 37% yoy. Retail loans have
grown by 33% yoy while SME loans have grown by 25% yoy. Overall deposits grew by 31% yoy
to `2.8 tn with domestic deposits growing by 30% yoy to `2.1 tn. CASA in the domestic business
grew marginally by 80 bps qoq to 35.1% in 3QFY11 representing a growth of 23% yoy. Overall
we are building loan growth at 18% CAGR for FY2011-13E.
NIMs improve 18 bps to 3.2%; domestic margins improve 20 bps to reach 3.8%
NIMs for 3QFY11 improved by 18 bps to 3.2% led by improved asset yields. Domestic margins
improved 20 bps to 3.8% while international margins were stable at 1.4%. Lending yields in
domestic business improved 17 bps to 10.3% while domestic cost of deposits was flat qoq at
5.3%. Net interest income grew by 43% yoy and 13% qoq to `22.9 bn. The positive impact of
higher lending yields was visible but we expect NIMs to moderate going forward as deposit costs
steadily increase.
Subdued performance on non-interest income, especially fee income
Performance on non-interest income was subdued with a growth of 3% yoy to `6.7 bn.
Treasury as well as fee income have been weak. Core fee income was flat yoy at `3.2 bn.
We are building fee income to grow by 15% CAGR for FY2011-13E. Treasury gains were
lower at `848 mn (down 38% yoy). Income from recoveries declined 6% yoy to `615 mn.
Slippages at less than 1% result in stable asset quality; PCR healthy at 85%
BoB continues to display a strong trend on asset quality with slippages falling to 0.6%
(annualized) for the quarter. The bank continues to target delinquency within 1.25% levels
in FY2011E. Reported gross NPL ratio, net NPL ratio and provision coverage ratio for the
quarter was broadly similar to the previous quarter at 1.3%, 0.4% and 85% (73% excluding
w/o), respectively. Retail NPL ratio has declined to 1.9% from 2.1% in the previous quarter.
Restructured assets at similar levels of 3QFY11; total slippages at 10%
Restructured loans stood at `56 bn as of December 2010, up by `220 mn from September
2010. Overall restructured assets are 2.9% (facility-wise) of loan book. Out of the total
restructured book, about `5.6 bn of loans (`10 mn and above forming 9% of restructured
loans) slipped into the NPL category during the last 7 quarters.
Other highlights for the quarter
The bank has ascertained a total provision of `20.6 bn for pension (annual charge of `4.1
bn amortized over 5 years) and `0.9 bn for gratuity. This excludes the provision made by
the bank in FY2010. The number of employees who participated in the second option
was 22,400. The bank has made a total provision of `3.1 bn for pension and `230 mn for
gratuity for 9MFY11. During the quarter it made a provision of `1.7 bn (`1 bn for
pensions and `0.7 bn for gratuity). We believe that employee expenses will grow at a very
slow pace given the low requirement any incremental pension/gratuity provisions.
The bank has made a provision of `535 mn for investment depreciation.
Capital adequacy ratios are comfortable with overall CAR at 12.5% and Tier-1 capital
(excluding profits for 9MFY11) at 7.7%. Including the profits the Tier-I CAR would have
been 9.2%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bank of Baroda (BOB)
Banks/Financial Institutions
Focus on consistency and quality maintained. Bank of Baroda delivered yet another
quarter of impeccable earnings, driven by steady loan growth (up 33%), strong deposit
growth (31% yoy), improving margins (up 18 bps qoq) and contained asset quality
(delinquency at 0.6% for 3Q). Credit/deposit ratio at 71% is amongst the best in the
industry and will support strong growth. A focused management continues to deliver
consistent growth, sustaining RoAs at 1.3% and RoEs at 22-24%. Stock trades at 1.5X
FY2012E PBR. Retain BUY.
Quality of earnings maintained with impeccable asset quality; remains our preferred pick
We maintain our BUY rating on BoB with a target price of `1,200. The bank has consistently been
delivering better than expected on most operating parameters. Even in 3Q, margins further
improved to 3.2% (increased by 18 bps qoq), loan growth was ahead of industry (33% yoy) with
slippages at just 0.6%, the best thus far. Even as we believe that the bank might not be able to
sustain these strong numbers on earnings and asset quality, there are enough levers on operating
expenses and provisions from next year to deliver the bank’s stated objective of RoA at 1.3% and
RoEs of 22-24%. We largely maintain our earnings post 3Q earnings. We build in about 20 bps
margin contraction in FY2012E over FY2011E levels. Stock trades at 1.5X FY2012E PBR and 7X
FY2012E PER.
Strong deposit growth provides enough liquidity to sustain strong credit growth
Against industry trends, BoB witnessed a good inflow of deposits (up 29% yoy) making it one of
the few large banks with a very liquid balance sheet (domestic CD ratio at 71% compared to 69%
in September 2010). Overall loans grew by 33% yoy (7% qoq) to `2.1 tn as of December 2010,
while domestic loans grew by 31% yoy and international loans by 37% yoy. Retail loans have
grown by 33% yoy while SME loans have grown by 25% yoy. Overall deposits grew by 31% yoy
to `2.8 tn with domestic deposits growing by 30% yoy to `2.1 tn. CASA in the domestic business
grew marginally by 80 bps qoq to 35.1% in 3QFY11 representing a growth of 23% yoy. Overall
we are building loan growth at 18% CAGR for FY2011-13E.
NIMs improve 18 bps to 3.2%; domestic margins improve 20 bps to reach 3.8%
NIMs for 3QFY11 improved by 18 bps to 3.2% led by improved asset yields. Domestic margins
improved 20 bps to 3.8% while international margins were stable at 1.4%. Lending yields in
domestic business improved 17 bps to 10.3% while domestic cost of deposits was flat qoq at
5.3%. Net interest income grew by 43% yoy and 13% qoq to `22.9 bn. The positive impact of
higher lending yields was visible but we expect NIMs to moderate going forward as deposit costs
steadily increase.
Subdued performance on non-interest income, especially fee income
Performance on non-interest income was subdued with a growth of 3% yoy to `6.7 bn.
Treasury as well as fee income have been weak. Core fee income was flat yoy at `3.2 bn.
We are building fee income to grow by 15% CAGR for FY2011-13E. Treasury gains were
lower at `848 mn (down 38% yoy). Income from recoveries declined 6% yoy to `615 mn.
Slippages at less than 1% result in stable asset quality; PCR healthy at 85%
BoB continues to display a strong trend on asset quality with slippages falling to 0.6%
(annualized) for the quarter. The bank continues to target delinquency within 1.25% levels
in FY2011E. Reported gross NPL ratio, net NPL ratio and provision coverage ratio for the
quarter was broadly similar to the previous quarter at 1.3%, 0.4% and 85% (73% excluding
w/o), respectively. Retail NPL ratio has declined to 1.9% from 2.1% in the previous quarter.
Restructured assets at similar levels of 3QFY11; total slippages at 10%
Restructured loans stood at `56 bn as of December 2010, up by `220 mn from September
2010. Overall restructured assets are 2.9% (facility-wise) of loan book. Out of the total
restructured book, about `5.6 bn of loans (`10 mn and above forming 9% of restructured
loans) slipped into the NPL category during the last 7 quarters.
Other highlights for the quarter
The bank has ascertained a total provision of `20.6 bn for pension (annual charge of `4.1
bn amortized over 5 years) and `0.9 bn for gratuity. This excludes the provision made by
the bank in FY2010. The number of employees who participated in the second option
was 22,400. The bank has made a total provision of `3.1 bn for pension and `230 mn for
gratuity for 9MFY11. During the quarter it made a provision of `1.7 bn (`1 bn for
pensions and `0.7 bn for gratuity). We believe that employee expenses will grow at a very
slow pace given the low requirement any incremental pension/gratuity provisions.
The bank has made a provision of `535 mn for investment depreciation.
Capital adequacy ratios are comfortable with overall CAR at 12.5% and Tier-1 capital
(excluding profits for 9MFY11) at 7.7%. Including the profits the Tier-I CAR would have
been 9.2%.
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