Bank of Baroda: Operating parameters best among the peers: Motilal oswal,

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Operating parameters best among the peers
Asset quality remains one of the best in the industry
Bank of Baroda (BoB) is capitalizing on its inherent strengths of (1) a large domestic
(3,200+) and international (75+) branch network (2) huge retail customer base (38m+), (3)
established brand value, (4) strong corporate client reach and (5) technological
advancement. Under the leadership of Mr Mallya, the bank's core operation has improved
significantly with improvement in CASA ratio and margins and fall in cost-to-core income
ratio from FY08 levels. GoI is expected to infuse Rs24.6b (14% of the existing net-worth),
to increase its shareholding to 58%. Despite the large capital infusion, RoE is expected to
remain strong at 21%+ (vs average of 13.7% over FY05-09). RoA is expected to remain
strong at 1.2%+ v/s ~0.8% over FY05-09.
Growth with quality: Over the past three years, strong loan CAGR of 25%, sustained
CASA ratio at 35%+ and improved margins vindicate the success of the management's
efforts. BoB's NIMs for its domestic business improved from ~3% in FY07 to ~3.8% in
3QFY11. Core operating profits to average assets improved from an average of 1.5%
over FY05-09 to 2%. Loan growth is expected to remain above industry growth while
focus on CASA growth would continue. With the government of India's capital infusion
of ~Rs24.6b to increase its stake to 58%, BoB's tier-1 capital will be ~10%. Thus
capital will not be a constraint for growth.
Asset quality comfort among the highest: Asset quality of BoB's is among the
best in the PSU banks with a well diversified loan book across international, retail and
domestic corporate/SME businesses. Over FY06-10, BoB has reported one of the
lowest slippage ratio at less than 1.2%. As of December 2010, BoB's PCR stood at
comfortable level of 73% (86% including write-off) and its restructured loans were
lowest amongst peers at 2.9%. Impeccable asset quality is leading to the lowest
credit cost in the industry at ~0.5%, driving strong earnings growth.
Operating leverage to boost profitability: BoB’s cost-to-assets is currently ~1.4%
and cost to core income ratio is ~40%. Improved technology and higher productivity
would continue to boost the overall profitability for the bank. We expect further operating
leverage for BoB and expect core cost to income ratio to decline to 38% by FY12 and
cost to assets to 1.28%.
Valuations at a premium: We expect the bank to post earnings of 16% CAGR over
FY11-13 due to 22% CAGR in loans and healthy operating parameters. While
performance on core operating parameters like (1) margins, (2) CASA growth and (3)
asset quality is commendable. Sustainability of operating parameters is a key for
superior valuation and the scope for negative surprises is limited. Maintain Neutral.


3QFY11 highlights
Key positives
 3QFY11, domestic NIMs expanded 20bp QoQ to
3.82% led by a stable cost of deposits at 5.27%,
improvement in yield on loans (up 17bp QoQ) and
improvement in CD ratio (73.6% v/s 71.6% a quarter
earlier).
 Domestic CASA deposits grew 23% YoY and 3%
QoQ to Rs756b. Domestic CASA ratio was 35.2%
from 35.9% a quarter earlier.
 GNPA and NNPA increased just 2% QoQ and PCR
including technical write off was 86%. Slippages in
3QFY11 were Rs2.7b (0.63% annualized slippage
ratio) and 9MFY11 slippages were Rs12.3b (~0.9%
annualized slippage ratio v/s 1.2% a year earlier).
Key negatives
 3QFY11 fee income growth moderated to 7% YoY
(down 5% QoQ). In 9MFY11 fees grew just 12%
YoY.
Other highlights
 BoB has declared 2nd pension liability (adjusted for
Rs4b excess pension provision made in FY10) of
Rs20.6b and plans to amortize it over next 5 years.
During the quarter the bank provided Rs1.8b towards
pension provisions and gratuity.