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Bank of Baroda – a consistent performer
Summary
Bank of Baroda (BoB) has always given consistent performance that to above industry and better
than some of its peers. Currently the major concern for banks is business growth and asset
quality. Even in tough economic conditions, the bank has grown well above the industry average
and maintained its asset quality. The bank has 3409 branches spread across India.
Above industry growth in business
In Q1FY12, advances have grown by 25.2% and deposits by 23% Y-o-Y. The bank has good
presence in international market and its international business constitutes around 20% of total
business. Advance growth was supported by international loan book growing by 28% Y-o-Y, retail
segment by 24% and SME by 31.4% Y-o-Y in Q1FY12. The bank has been reducing its unsecured
loan book which now constitutes ~20% of total loan book. The banks CASA deposits are well
above 30%, as share of domestic CASA deposits stood at 33.9% in terms of aggregate deposits
and 35.9% in terms of core deposits in Q1FY12.The bank is expected to grow advance book by
24% above industry growth of 18% in FY12E.
Stable margins will add to profitability
The banks NIM was marginally down by 3bps to 2.87% in Q1FY12 vs 2.9% in Q1FY11. This was on
account of higher increase in cost of deposits of 97bps Y-o-Y vs 94bps Y-o-Y increase in yield on
funds. The bank is expected to maintain margins as it is reducing its dependence on bulk
deposits and increasing proportion of high yielding assets.
Healthy asset quality as compared to peers
The bank has continuously maintained its asset quality. GNPA stood at 1.46% in Q1FY12 vs 1.41%
in Q1FY11. The bank has maintained high Provision Coverage Ratio of 82.52% in Q1FY12. The
bank has restructured loan book of `71.6bn (~3% of total advances) in Q1FY12. During the
quarter `4.5 bn loans were restructured. The bank witnessed slippages in agriculture and
corporate segment for which it has made provision of `1.3bn in Q1FY12. The bank had CAR of
13.1% and Tier 1 capital of 9.06% in Q1FY12. The banks balance sheet is strong and can support
the growth targets set by the bank.
Valuation
The bank has traded in range of 1.7x to 1.8x ABV in the past and currently is trading at 1.4x
ABV. The stock has corrected by 16% in last 3 months which has lead to lower valuation multiple
due to growth and asset quality concerns that has crippled the banking industry. We feel the
bank would continue its performance going ahead. The stock is trading at 1.2x and 1.0x BV of
FY12E and FY13E. We feel such low multiple is not warranted for the stock with such strong
fundamentals and it would trade at higher multiple once interest rate cycle peaks out. We
expect the stock to trade at 1.2x BV of FY13E implying target price of `901 in long term.
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