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Bank of Baroda
F1Q12: Lower Provisions
Offset Weaker NII
Quick Comment: BOB reported profits of Rs 10.3 bn
(-20% QoQ, +20% YoY) for QE Jun-11. PBT
(excluding extra-ordinaries) was 5% ahead of our
estimates. Lower provisions were partially offset by
weaker NII.
We believe that revenue growth at SOE Banks will
continue to be weak owing to sustained margin
pressure. Further, given the increase in lending
rates the potential for fresh asset quality issues
emerging later in the year remains a potential risk.
Across all metrics, BOB is trading significantly
above long-term averages (9.4x F12e P/E, 1.4x F12e
PBV). Hence, we maintain UW.
The key highlights from the results include:
Adj. global NIM moved lower by 25 bps QoQ to
2.87%: Domestic NIM moved lower by 31 bps QoQ to
3.39%. Adj. NII was down 3% QoQ / up 24% YoY. The
reason for the sharp underlying compression is funding
cost pressures –: a) Upward repricing of domestic term
deposits (which on our computations have moved up to
8.2% from 7.3% in QE Mar-11), and b) Saving a/c
interest rate increase from 3.5% to 4%.
Further, margins would have gotten support from free
funds effect from equity issuance received from the
government towards end-March. If we adjust for this,
global NIMs would be down ~30-35 bps QoQ.
Loans were up 2% QoQ, 25% YoY. Deposits were up
2% QoQ, 23% YoY. Domestic CASA/deposits moved 45
bps lower QoQ to 33.9%. Domestic loans were flat QoQ,
+24% YoY. International loans were up 8% QoQ, 28%
YoY.
Core non-interest income growth was robust: Non-int
income excluding capital gains, recoveries and misc. income
was up 23% YoY in QE Jun-11 (vs. 24% YoY in QE Mar-11).
CEB (fee) growth accelerated to 36% YoY (from 19% in
previous quarter) – however, growth of other components (the
volatile FX segment and incidental charges) moderated.
Contribution of net capital gains + recoveries to PBT was -4%
(vs. 6% in QE Mar-11 and 15% in QE Jun-10).
Costs were up 17% YoY, -26% QoQ. F4Q11 was vitiated
owing to one-time retirement related expenses. Excluding
retirement related expenses, employee expenses were -12%
QoQ, +16% YoY. Other expenses were -10% QoQ, +24% YoY
GNPLs were up 9% QoQ. New NPL creation moved lower
QoQ to 1% of opening loans (annualized) vs 1.3% in F4Q11.
Unlike other SOE banks, BOB did not have any issues with
system based classification of NPLs as they had already
migrated to the same multiple years back.
LLP/avg. loans (annualized) were much lower QoQ at 23 bps
from 78 bps in F4Q11. Consequently, coverage (including
technical write-offs) moved lower QoQ to 82.5% from 85% in
QE-Mar-11.
The 23 bps of loan loss provision also included some
provisions on account of the RBI provisioning norms change –
however, we don’t have a breakdown of these.
Adj. Tier I ratio at 9.5% (down 50 bps QoQ). Our rough
computations suggest that risk weighted assets have grown by
10% QoQ – ahead of the total loans + investments growth of
5% QoQ. This implies either a shift towards higher risk
weighted assets or an increase in off-balance sheet exposures.
In our view, the latter could probably help explain part of the
increase in fee income seen this quarter.
Target Price Discussion
We arrive at our price target of Rs805 using a probability
weighted three-phase residual income model – a five-year high
growth period, a 10-year maturity period, followed by a
declining period. We assign 25% weight to bear case, 10%
weight to bull case and residual 65% to base case
We use a cost of equity of 13.5%, assuming a beta of 1.0, a
risk-free rate of 8.5% (current Indian 10-year government bond
yield), and a market risk premium of 5.5%.
Risks to Our Price Target
Key downside risks to our price target include
slower-than-expected loan growth, sharp compression in NIMs
and significant deterioration in asset quality (restructured loans
slippages).
Upside risks include: fee income being stronger than
expectations and credit costs being lower than expectations
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bank of Baroda
F1Q12: Lower Provisions
Offset Weaker NII
Quick Comment: BOB reported profits of Rs 10.3 bn
(-20% QoQ, +20% YoY) for QE Jun-11. PBT
(excluding extra-ordinaries) was 5% ahead of our
estimates. Lower provisions were partially offset by
weaker NII.
We believe that revenue growth at SOE Banks will
continue to be weak owing to sustained margin
pressure. Further, given the increase in lending
rates the potential for fresh asset quality issues
emerging later in the year remains a potential risk.
Across all metrics, BOB is trading significantly
above long-term averages (9.4x F12e P/E, 1.4x F12e
PBV). Hence, we maintain UW.
The key highlights from the results include:
Adj. global NIM moved lower by 25 bps QoQ to
2.87%: Domestic NIM moved lower by 31 bps QoQ to
3.39%. Adj. NII was down 3% QoQ / up 24% YoY. The
reason for the sharp underlying compression is funding
cost pressures –: a) Upward repricing of domestic term
deposits (which on our computations have moved up to
8.2% from 7.3% in QE Mar-11), and b) Saving a/c
interest rate increase from 3.5% to 4%.
Further, margins would have gotten support from free
funds effect from equity issuance received from the
government towards end-March. If we adjust for this,
global NIMs would be down ~30-35 bps QoQ.
Loans were up 2% QoQ, 25% YoY. Deposits were up
2% QoQ, 23% YoY. Domestic CASA/deposits moved 45
bps lower QoQ to 33.9%. Domestic loans were flat QoQ,
+24% YoY. International loans were up 8% QoQ, 28%
YoY.
Core non-interest income growth was robust: Non-int
income excluding capital gains, recoveries and misc. income
was up 23% YoY in QE Jun-11 (vs. 24% YoY in QE Mar-11).
CEB (fee) growth accelerated to 36% YoY (from 19% in
previous quarter) – however, growth of other components (the
volatile FX segment and incidental charges) moderated.
Contribution of net capital gains + recoveries to PBT was -4%
(vs. 6% in QE Mar-11 and 15% in QE Jun-10).
Costs were up 17% YoY, -26% QoQ. F4Q11 was vitiated
owing to one-time retirement related expenses. Excluding
retirement related expenses, employee expenses were -12%
QoQ, +16% YoY. Other expenses were -10% QoQ, +24% YoY
GNPLs were up 9% QoQ. New NPL creation moved lower
QoQ to 1% of opening loans (annualized) vs 1.3% in F4Q11.
Unlike other SOE banks, BOB did not have any issues with
system based classification of NPLs as they had already
migrated to the same multiple years back.
LLP/avg. loans (annualized) were much lower QoQ at 23 bps
from 78 bps in F4Q11. Consequently, coverage (including
technical write-offs) moved lower QoQ to 82.5% from 85% in
QE-Mar-11.
The 23 bps of loan loss provision also included some
provisions on account of the RBI provisioning norms change –
however, we don’t have a breakdown of these.
Adj. Tier I ratio at 9.5% (down 50 bps QoQ). Our rough
computations suggest that risk weighted assets have grown by
10% QoQ – ahead of the total loans + investments growth of
5% QoQ. This implies either a shift towards higher risk
weighted assets or an increase in off-balance sheet exposures.
In our view, the latter could probably help explain part of the
increase in fee income seen this quarter.
Target Price Discussion
We arrive at our price target of Rs805 using a probability
weighted three-phase residual income model – a five-year high
growth period, a 10-year maturity period, followed by a
declining period. We assign 25% weight to bear case, 10%
weight to bull case and residual 65% to base case
We use a cost of equity of 13.5%, assuming a beta of 1.0, a
risk-free rate of 8.5% (current Indian 10-year government bond
yield), and a market risk premium of 5.5%.
Risks to Our Price Target
Key downside risks to our price target include
slower-than-expected loan growth, sharp compression in NIMs
and significant deterioration in asset quality (restructured loans
slippages).
Upside risks include: fee income being stronger than
expectations and credit costs being lower than expectations
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