Bank of Baroda 4Q11: Bad quarter after a long time; TP of Rs1,100.:: Macquarie Research

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Bank of Baroda
4Q11: Bad quarter after a long time
Event
 Net profit surprises, but core operating earnings disappoint: BOB’s net
profit surprised on the upside by 17%, mainly due to tax refunds/writebacks,
which resulted in a 5% tax rate in 4Q FY11. At the PBT level, numbers were
14% below our estimates due to higher credit charges and operating
expenses.

Impact
 Second option of pensions for retirees taken upfront: The second option of
pensions for retirees of Rs5.54bn has been provided upfront and constitutes
nearly 20% of the overall pension liability. Going by BOB’s result, the second
option of pension liability could be taken upfront by other PSU banks, which
could produce a large impact on earnings for all other PSU banks.
 Too many one-offs – Seems like an “extraordinary” quarter: Interest on
income tax refunds of Rs2.5bn, adjusted for which domestic NIM will be 3.7%
(compared to the reported 4.16%), down 12bps QoQ, and tax write-backs
have boosted earnings.
 NPL increase comes as a negative surprise; slippages from restructured
assets have not abated: Though the full year delinquency rate of 1.06% is
much lower than that of BOB’s peers, which will be at least at 1.5%, a 14%
QoQ increase in NPLs was a negative surprise. The reason is we didn’t
expect NPLs to inch up considering that, for the past three quarters, the bank
had hardly seen any increase in NPLs and had delivered well. The bank this
quarter saw slippages of Rs2.6bn from restructured assets, which was nearly
40% of the slippages observed this quarter. A closer look at the NPL trends
reveals that NPLs this quarter came from the agricultural and large and
medium industries portfolio. Retail continues to do well.
 Pressure on CASA continues, deposit repricing yet to fully catch up:
Due to high term deposit rates and consequent switching from savings to term
deposits by customers, the CASA ratio continued to be under pressure,
declining by 120bps YoY and 80bps QoQ to 34.4%. What surprised was a
sharp 36bps QoQ increase in cost of deposits. Clearly, lending rate hikes this
quarter have arrested the NIM decline; however, with no lending rate hikes in
1Q FY12, coupled with a lagged effect of deposit repricing, NIMs are likely to
be under pressure in the near term, in our view.
Earnings and target price revision
 No change. We are introducing FY14 numbers.
Price catalyst
 12-month price target: Rs1,100.00 based on a Gordon Growth methodology.
 Catalyst: Improvement in asset quality from 2Q FY12 onwards.
Action and recommendation
 Maintain Outperform with TP of Rs1,100.