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Bank of Baroda
Healthy balance sheet growth: At 31% in FY11, credit growth of the
country’s third largest public sector bank remains above industry
average. The bank’s market share in deposits has gone up from 3.7%
to 4.0% and in advances from 3.5% to 4.0% between FY07 to FY11.
Despite management guiding growth to moderate, it will continue to
remain above the industry average. It has a healthy CAR of 14.1% that
will enable it to grow its balance sheet without capital constraints.
NIMs to come under pressure: NIMs sharply rebounded to 3.0% in
FY11 from 2.5% in FY10 as cost of deposits decreased by 15 bps. We
expect normalization in NIMs, which are expected to fall by 10 bps to
2.9% in FY12E on account of increasing cost of funds, and then to
stabilize at similar levels in FY13E.
Slippage seems to have bottomed out: Slippage decreased to 0.9%
in FY11 as compared to 1.1% in FY10. We expect slippage to rise again
to 1.1% for FY12-13E as seasoning of last three years high credit
growth takes place. We do not expect credit costs to increase sharply as
the bank has a significant buffer in its 85% provision coverage.
Operational efficiency: Cost to income ratio has improved despite
higher one time pension provisioning for retired employees. Cost to
income will only improve going forward as this one-off expense will not
recur in subsequent years.
Limited scope for further improvement in return ratios: Return
ratios are superior to its peers and seem to have peaked. It has a ROA
of 1.3% and ROE of 23.5%. We perceive limited scope for further
improvement in return ratios.
Valuation: At the CMP the stock is trading at 7.0x and 5.7x FY12E and
FY13E earnings, and at 1.5x and 1.2x P/ABV FY12E and FY13E
respectively, which we feel is reasonable considering its pan-India
presence, strong branch network and high ROE. We expect an ROA of
1.3% and ROE of 21.9% in FY13E. We initiate coverage with a HOLD
rating on the stock with the price target of Rs870 based on P/ABV of
1.2x FY13E
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