Bank of Baroda (BOB.BO, Rs894.5, OW, Price Target Rs1,085) :Morgan Stanley Research

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Investment Thesis
• BOB is the fourth largest bank in India.
• Very comfortably placed from an asset
quality perspective given coverage
ratio of 85.4% and a low impaired loan
ratio of 4.3%.
• Robust deposit franchise with
CASA/Deposits at ~35% –beneficial in
a rising rate scenario.
• Expect core ROE (ex-cap gains and
recoveries) to improve from 14.6% in
F2010 to 20.4% in F2011.
• Well capitalized following recent
infusion from government – Tier I ratio
at 10.9%. Government ownership has
increased to 58% – implying potential
for equity capital raising in future.
• Current valuations at 9.4x F12e
earnings and 1.5x F12e BV are still
attractive.
Key Value Drivers
• Margin progression.
• Trend in loan growth.
• Fee income growth.
• Credit costs.
• Operating costs.
Potential Catalysts
• System wide deposit / loan growth
trend
• New NPL formation (reported on
quarterly basis).
• Any newsflow on Dubai/Middle-East
region / Dubai World exposures
Key Risks
• Higher than expected impaired loan
formation.
• Exposure to Middle-East region
(including US$200mn exposure to
Dubai World).
• Disruptive rise in short rates.
• Muted system-wide loans growth.


Price Target Rs1,085 Derived from our probability weighted residual income model.
Bull
Case
Rs1,380
2.4x F2013e
BVPS
Stronger than expected macro outlook leads to faster revenue
growth: Loan growth is higher than our base case estimates at
25% for F2012/13. Fee income and margin progression is much
stronger than expectations driving strong revenue growth.
Base
Case
Rs1,140
2.0x F2013e
BVPS
Margin compression driven by rise in cost of deposits: Loan
book grows at 17% in F2012 & 18% in F2013. Reported margins
compress from 3.2% in F3Q11 to 2.8% in F4Q12e. Credit costs
(annual) average 65 bps in F2012-13.
Bear
Case
Rs620
1.1x F2013e
BVPS
Disruptive rise in rates – higher than expected credit costs;
loan growth remains muted: Loan growth will be below base
case expectation at 14%. Margins compress more than our base
case estimates driven by disruptive rise in rates owing to capital
outflows. Flow of impaired loan formation resumes (triggered by
domestic and problems with Middle-East exposure) and credit cost
are higher than base case at 100 bps.