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Bank of Baroda
Neutral
BOB.BO, BOB IN
Annual report analysis: Pension and power remain key concerns
• We maintain our Neutral rating on BOB after our detailed annual
report analysis. High power sector exposure and optimistic pension
assumptions remain our concerns. Valuations have come off post
4Q11 results but we believe ROEs have peaked and EPS is starting to
moderate from weak ROAs and equity dilution.
• Deposit concentration has increased: Domestic CASA share has come
off from ~35.9% in Sep-10 to ~34.4% in Mar-11. Also, the
concentration of top-20 depositors increased to 10% from 7% in FY10,
highlighting increased reliance on wholesale funds. Overall, with lower
margins, a moderation in loan growth and uptick in credit costs, we
expect muted profit growth for BOB in FY12.
• Pension highlights: We have highlighted our view that pension
assumptions for all PSU banks are optimistic and the risk from large
pension provisions is high. The annual report shows an unfunded
liability of Rs15B which would be amortized over FY12-15E. BOB's
wage inflation assumption of 4% looks optimistic and lower than that of
some PSU peers (4-5%); this could add to pension pressure in the future.
• Asset quality – High power exposure: Sectoral NPA breakdown shows
that gross NPAs have moved up across all segments except for retail
loans. Asset quality has held up relatively well for BOB but we believe
credit cost of ~50bp in FY11 is unsustainable and 4Q11 highlighted risk
from increased delinquency relative to street expectations. Funded
power exposure grew by ~32% y/y equating to ~8.1% of total exposure.
Also apart from restructuring in domestic business, BOB restructured
~Rs30B of international advances (5% of international advances) on
which we await more clarity from the management.
• Maintain Neutral: We marginally adjust our earnings estimates but
maintain our Mar-12 PT of Rs900. A key upside risk to our PT is that the
4Q slippage turns out to be a one-off trend and a key downside risk is
that tight liquidity continues to weaken margins.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bank of Baroda
Neutral
BOB.BO, BOB IN
Annual report analysis: Pension and power remain key concerns
• We maintain our Neutral rating on BOB after our detailed annual
report analysis. High power sector exposure and optimistic pension
assumptions remain our concerns. Valuations have come off post
4Q11 results but we believe ROEs have peaked and EPS is starting to
moderate from weak ROAs and equity dilution.
• Deposit concentration has increased: Domestic CASA share has come
off from ~35.9% in Sep-10 to ~34.4% in Mar-11. Also, the
concentration of top-20 depositors increased to 10% from 7% in FY10,
highlighting increased reliance on wholesale funds. Overall, with lower
margins, a moderation in loan growth and uptick in credit costs, we
expect muted profit growth for BOB in FY12.
• Pension highlights: We have highlighted our view that pension
assumptions for all PSU banks are optimistic and the risk from large
pension provisions is high. The annual report shows an unfunded
liability of Rs15B which would be amortized over FY12-15E. BOB's
wage inflation assumption of 4% looks optimistic and lower than that of
some PSU peers (4-5%); this could add to pension pressure in the future.
• Asset quality – High power exposure: Sectoral NPA breakdown shows
that gross NPAs have moved up across all segments except for retail
loans. Asset quality has held up relatively well for BOB but we believe
credit cost of ~50bp in FY11 is unsustainable and 4Q11 highlighted risk
from increased delinquency relative to street expectations. Funded
power exposure grew by ~32% y/y equating to ~8.1% of total exposure.
Also apart from restructuring in domestic business, BOB restructured
~Rs30B of international advances (5% of international advances) on
which we await more clarity from the management.
• Maintain Neutral: We marginally adjust our earnings estimates but
maintain our Mar-12 PT of Rs900. A key upside risk to our PT is that the
4Q slippage turns out to be a one-off trend and a key downside risk is
that tight liquidity continues to weaken margins.
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