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Bank of Baroda (BOB.BO)
Healthy Franchise, But Relatively Priced In
Reducing Target Price to Rs850, maintain Hold — We are revising our EVA
based target price for Bank of Baroda to Rs850 (from Rs930 earlier) though we
maintain our Hold/Medium Risk recommendation. We believe the bank has
exhibited strong performance and its business momentum is healthy, despite the
macro environmental challenges. However, given the correction in valuations for
the sector, the bank continues to trade in-line with the best in class government
banks. Coupled with the prevailing macro uncertainty, this should cap valuations
at current levels.
Expect Growth and Quality to Continue — Bank of Baroda has been
operationally strong with: a) Good loan growth (25%yoy); b) Healthy net interest
margins (287bps in 1Q12); and c) Robust asset quality with low credit costs.
While we expect some moderation in growth, it should still be ahead of peers.
Asset quality is expected to remain a key strength for the bank, as it has a well
diversified loan book and relatively lower exposure to sensitive sectors (Power:
6-7% of loans, SEBs: 3%). Overall, BOB's balance between quality of balance
sheet and P&L places it ahead of peers.
Quant View: Contrarian — As per our quantitative methodology, Bank of Baroda
currently lies in the Contrarian quadrant of our Value-Momentum map with
relatively weak momentum despite its relatively attractive valuations.
Bank of Baroda currently lies in the Extreme corner of the Contrarian quadrant of
our Value-Momentum map with relatively weak momentum but strong value scores.
The stock has moved from the Attractive quadrant to the Contrarian quadrant in the
past 3 months indicating a fall in momentum scores, even though the stock has
maintained an attractive valuation score. Compared to its peers in the Banks sector,
Bank of Baroda fares better on the valuation metric but worse on the momentum
metric. Similarly, compared to its peers in its home market of India, Bank of Baroda
fares better on the valuation metric but worse on the momentum metric.
From a macro perspective, Bank of Baroda has a low beta to the region, so can be
expected to hold its own given a decline in the regional market. It is also likely to
benefit from falling commodity (ex-oil) prices, falling EM yields, and a weaker US
Dollar.
Bank of Baroda
Company description
Bank of Baroda (BOB) was incorporated in 1908 as a private institution, and
subsequently nationalized in 1969. The bank is headquartered in Baroda, Gujarat.
The government holds 57% of the bank's equity. BOB is among the top-five banks
in the country, with close to 5.7% share of the deposits and advances of the banking
system. BOB has a large nationwide branch network of 3,409 branches, and has 86
offices in 25 countries.
Investment strategy
We rate BOB Hold/Medium Risk (2M). BOB has made visible improvements in key
operating parameters and has shown consistent growth and profitability over the
last 24-36 months. Loan growth, which historically lagged the industry, has been
above 25%, margins have sustained at over 3%, and asset quality has continued to
improve, despite challenges faced by most peers. While valuations have corrected
recently, BOB still trades above its historical median valuations and also at a
premium to most of the leading public sector banks. Structurally, we believe BOB
should trade at par with its larger peers and while BOB's fundamentals remain
healthy, we view that this appears to be priced in current valuations.
Valuation
Our target price of Rs850 is based on CIRA's EVA model, which we believe
captures the long-term value of the business and is a standard valuation measure
for the CIRA India banking coverage. Our target price assumes: a) risk-free rate of
8.0% (in line with our assumptions for other Indian banks); b) long-term loan loss
provisions of 90bps (lower than industry average of 100bps); c) loan spreads of
210bps, slightly higher than the 200bps industry average; and d) long-term cost
income ratio of 31%. We benchmark our target price on a 1.25x 1-yr forward
(Sep’12) PBV. Given BOB's strong and consistent asset quality performance, high
growth and improving return profile, we are now valuing it at par with other best of
breed government banks (such as SBI). Our fair value based on this methodology is
Rs850.
Risks
We rate BOB Medium Risk, even as our quantitative risk-rating system, which
tracks 260-day share price volatility, suggests Low Risk. We believe, BOB's higher
sensitivity to a rising interest rate environment suggests a slightly higher risk profile
than current. Key upside risks which could sustain the shares above our target price
include: (1) Improvement in its funding franchise leading to an increase. in NIMs; (2)
Lower than expected asset quality deterioration and loan loss charges; and (3)
Improvement in fee income growth and return profile. Key downside risks to our
target price include: a) Worsening of the asset quality environment; b) Moderation in
its funding franchise, which could hurt NIMs, especially in a tight liquidity
environment and c) Lower than expected loan growth levels.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bank of Baroda (BOB.BO)
Healthy Franchise, But Relatively Priced In
Reducing Target Price to Rs850, maintain Hold — We are revising our EVA
based target price for Bank of Baroda to Rs850 (from Rs930 earlier) though we
maintain our Hold/Medium Risk recommendation. We believe the bank has
exhibited strong performance and its business momentum is healthy, despite the
macro environmental challenges. However, given the correction in valuations for
the sector, the bank continues to trade in-line with the best in class government
banks. Coupled with the prevailing macro uncertainty, this should cap valuations
at current levels.
Expect Growth and Quality to Continue — Bank of Baroda has been
operationally strong with: a) Good loan growth (25%yoy); b) Healthy net interest
margins (287bps in 1Q12); and c) Robust asset quality with low credit costs.
While we expect some moderation in growth, it should still be ahead of peers.
Asset quality is expected to remain a key strength for the bank, as it has a well
diversified loan book and relatively lower exposure to sensitive sectors (Power:
6-7% of loans, SEBs: 3%). Overall, BOB's balance between quality of balance
sheet and P&L places it ahead of peers.
Quant View: Contrarian — As per our quantitative methodology, Bank of Baroda
currently lies in the Contrarian quadrant of our Value-Momentum map with
relatively weak momentum despite its relatively attractive valuations.
Bank of Baroda currently lies in the Extreme corner of the Contrarian quadrant of
our Value-Momentum map with relatively weak momentum but strong value scores.
The stock has moved from the Attractive quadrant to the Contrarian quadrant in the
past 3 months indicating a fall in momentum scores, even though the stock has
maintained an attractive valuation score. Compared to its peers in the Banks sector,
Bank of Baroda fares better on the valuation metric but worse on the momentum
metric. Similarly, compared to its peers in its home market of India, Bank of Baroda
fares better on the valuation metric but worse on the momentum metric.
From a macro perspective, Bank of Baroda has a low beta to the region, so can be
expected to hold its own given a decline in the regional market. It is also likely to
benefit from falling commodity (ex-oil) prices, falling EM yields, and a weaker US
Dollar.
Bank of Baroda
Company description
Bank of Baroda (BOB) was incorporated in 1908 as a private institution, and
subsequently nationalized in 1969. The bank is headquartered in Baroda, Gujarat.
The government holds 57% of the bank's equity. BOB is among the top-five banks
in the country, with close to 5.7% share of the deposits and advances of the banking
system. BOB has a large nationwide branch network of 3,409 branches, and has 86
offices in 25 countries.
Investment strategy
We rate BOB Hold/Medium Risk (2M). BOB has made visible improvements in key
operating parameters and has shown consistent growth and profitability over the
last 24-36 months. Loan growth, which historically lagged the industry, has been
above 25%, margins have sustained at over 3%, and asset quality has continued to
improve, despite challenges faced by most peers. While valuations have corrected
recently, BOB still trades above its historical median valuations and also at a
premium to most of the leading public sector banks. Structurally, we believe BOB
should trade at par with its larger peers and while BOB's fundamentals remain
healthy, we view that this appears to be priced in current valuations.
Valuation
Our target price of Rs850 is based on CIRA's EVA model, which we believe
captures the long-term value of the business and is a standard valuation measure
for the CIRA India banking coverage. Our target price assumes: a) risk-free rate of
8.0% (in line with our assumptions for other Indian banks); b) long-term loan loss
provisions of 90bps (lower than industry average of 100bps); c) loan spreads of
210bps, slightly higher than the 200bps industry average; and d) long-term cost
income ratio of 31%. We benchmark our target price on a 1.25x 1-yr forward
(Sep’12) PBV. Given BOB's strong and consistent asset quality performance, high
growth and improving return profile, we are now valuing it at par with other best of
breed government banks (such as SBI). Our fair value based on this methodology is
Rs850.
Risks
We rate BOB Medium Risk, even as our quantitative risk-rating system, which
tracks 260-day share price volatility, suggests Low Risk. We believe, BOB's higher
sensitivity to a rising interest rate environment suggests a slightly higher risk profile
than current. Key upside risks which could sustain the shares above our target price
include: (1) Improvement in its funding franchise leading to an increase. in NIMs; (2)
Lower than expected asset quality deterioration and loan loss charges; and (3)
Improvement in fee income growth and return profile. Key downside risks to our
target price include: a) Worsening of the asset quality environment; b) Moderation in
its funding franchise, which could hurt NIMs, especially in a tight liquidity
environment and c) Lower than expected loan growth levels.
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