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We initiate coverage of Bank of Baroda (BoB) with a BUY rating. Our 3-stage DDM provides weighted average price target of INR 986, an upside of 30%. We like BoB for its attractive valuation, healthy earnings growth, management focus on NII growth, stronger fee income and better asset quality among peers.
→ We expect BoB to deliver 19% earnings CAGR over FY2012-14E and average RoE of 21% for FY2012-14E.
→ Earnings growth will be driven by healthy credit CAGR (FY2012-14E) of 21%, stable margins, lower loan loss provisions and improvement in fee income as the bank leverages its customer relationships.
→ BoB’s GNPL ratio is 1.46% as of 1QFY12 and impaired assets (gross NPLs + restructured loans) at 3.1%.
→ We expect the GNPL ratio to rise to 1.97% in FY2013E, as some restructured loans slip into NPLs and new ones emerge. However, we believe the bank remains comfortable with a higher provision coverage ratio of about 82% at present.
→ BOB’s calibrated growth pace with focus on margins should bear result by 4QFY12 and improve from there, as slower credit growth will reduce probability of fresh deposit warfare among banks.
Valuation
Post risk aversion and street concern about PSU banks, BoB is down -20% on absolute basis and -8% on relative basis (to NIFTY index) YTD. BoB is at present trading at an attractive valuation of 1.0x FY2013E book value and 5.5x FY2013E EPS. We expect once the near term headwinds clear off, BoB should start outperforming the benchmark indices on the back of strong fundamentals and the macro turnaround in India. We initiate coverage with a “BUY” recommendation. Our 3-Stage DDM based weighted average 12-month price target is INR 986 (implies 1.3x FY2013E BVPS). For our DDM model, we are assuming a discount rate of 13.8%, payout ratio of 22% over FY2012-FY2014E and terminal growth of 5.4%.
Key risks
Key risks to our target price and investment view are
→ Higher than expected slippages due to restructured books
→ Global turmoil resulting to safe flight of capital resulting to margin compression and
→ Margin compression if RBI continues with its tightening process beyond September quarter.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We initiate coverage of Bank of Baroda (BoB) with a BUY rating. Our 3-stage DDM provides weighted average price target of INR 986, an upside of 30%. We like BoB for its attractive valuation, healthy earnings growth, management focus on NII growth, stronger fee income and better asset quality among peers.
→ We expect BoB to deliver 19% earnings CAGR over FY2012-14E and average RoE of 21% for FY2012-14E.
→ Earnings growth will be driven by healthy credit CAGR (FY2012-14E) of 21%, stable margins, lower loan loss provisions and improvement in fee income as the bank leverages its customer relationships.
→ BoB’s GNPL ratio is 1.46% as of 1QFY12 and impaired assets (gross NPLs + restructured loans) at 3.1%.
→ We expect the GNPL ratio to rise to 1.97% in FY2013E, as some restructured loans slip into NPLs and new ones emerge. However, we believe the bank remains comfortable with a higher provision coverage ratio of about 82% at present.
→ BOB’s calibrated growth pace with focus on margins should bear result by 4QFY12 and improve from there, as slower credit growth will reduce probability of fresh deposit warfare among banks.
Valuation
Post risk aversion and street concern about PSU banks, BoB is down -20% on absolute basis and -8% on relative basis (to NIFTY index) YTD. BoB is at present trading at an attractive valuation of 1.0x FY2013E book value and 5.5x FY2013E EPS. We expect once the near term headwinds clear off, BoB should start outperforming the benchmark indices on the back of strong fundamentals and the macro turnaround in India. We initiate coverage with a “BUY” recommendation. Our 3-Stage DDM based weighted average 12-month price target is INR 986 (implies 1.3x FY2013E BVPS). For our DDM model, we are assuming a discount rate of 13.8%, payout ratio of 22% over FY2012-FY2014E and terminal growth of 5.4%.
Key risks
Key risks to our target price and investment view are
→ Higher than expected slippages due to restructured books
→ Global turmoil resulting to safe flight of capital resulting to margin compression and
→ Margin compression if RBI continues with its tightening process beyond September quarter.
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