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UBS Investment Research
Bank of Baroda
LLP is unsustainably low
Current loan loss provisioning significantly lower than peers’
We believe non-performing loan (NPL) risk in the system is increasing due to
issues in the power sector and the global economic slowdown. Bank of Baroda
(BOB) has loan loss provisions (LLP) of 63bp in FY11, which we believe is low
given rising asset quality risk from the SME, power, real estate, and international
loan segments. We believe the bank’s loan book has medium risk given exposure
to the textile, power, SME, international loans, and commercial real estate
segments. However, we think its LLP is too low.
Cut earnings estimates by 8-10% to be 14% lower than consensus
Its peer banks (SBI, PNB, and BOI) have reported higher NPLs in farm loans,
international lending and the SME segment. BOB has so far been able to maintain
lower slippages (almost half) than its peers, which we think could be difficult to
sustain. We lower our FY12/13 earnings estimates by 10%/8% as we build in a
higher loan loss charge of 75bp (from 65bp). We are now 14% lower than
consensus earnings estimates.
Share price has outperformed peers’ by 11% YTD
While BOB’s share price is down 11% YTD, it has outperformed its PSU bank
peers and the Sensex by 11% and 7%, respectively. The stock is a consensus Buy.
We forecast an 8% earnings CAGR over FY11-13. The stock is trading at 1.3x
FY13E adjusted book value and 6.3x FY13E earnings.
Valuation: lower price target to Rs800.00; downgrade from Buy to Sell
We lower our price target from Rs1,050.00 to Rs800.00 and downgrade our rating
to Sell. We derive our price target using the residual income model, assuming a
terminal ROE and cost of equity at 13.3%. We adjust our FY12/13/14 EPS
estimates from Rs116.1/139.4/172.6 to Rs104.4/125.7/156.3.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Bank of Baroda
LLP is unsustainably low
Current loan loss provisioning significantly lower than peers’
We believe non-performing loan (NPL) risk in the system is increasing due to
issues in the power sector and the global economic slowdown. Bank of Baroda
(BOB) has loan loss provisions (LLP) of 63bp in FY11, which we believe is low
given rising asset quality risk from the SME, power, real estate, and international
loan segments. We believe the bank’s loan book has medium risk given exposure
to the textile, power, SME, international loans, and commercial real estate
segments. However, we think its LLP is too low.
Cut earnings estimates by 8-10% to be 14% lower than consensus
Its peer banks (SBI, PNB, and BOI) have reported higher NPLs in farm loans,
international lending and the SME segment. BOB has so far been able to maintain
lower slippages (almost half) than its peers, which we think could be difficult to
sustain. We lower our FY12/13 earnings estimates by 10%/8% as we build in a
higher loan loss charge of 75bp (from 65bp). We are now 14% lower than
consensus earnings estimates.
Share price has outperformed peers’ by 11% YTD
While BOB’s share price is down 11% YTD, it has outperformed its PSU bank
peers and the Sensex by 11% and 7%, respectively. The stock is a consensus Buy.
We forecast an 8% earnings CAGR over FY11-13. The stock is trading at 1.3x
FY13E adjusted book value and 6.3x FY13E earnings.
Valuation: lower price target to Rs800.00; downgrade from Buy to Sell
We lower our price target from Rs1,050.00 to Rs800.00 and downgrade our rating
to Sell. We derive our price target using the residual income model, assuming a
terminal ROE and cost of equity at 13.3%. We adjust our FY12/13/14 EPS
estimates from Rs116.1/139.4/172.6 to Rs104.4/125.7/156.3.
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