Bank of Baroda (BOB IN, INR 710, Hold)
We recently met the Bank of Baroda (BoB) management. Key highlights of our interaction are: (i) in light of stress in macroeconomic environment, Q1FY13 slippages could be at par with Q4FY12; (ii) restructuring to continue from CDR cases and SEBs; (iii) NIMs to decline 10-15bps over FY13E given declining rates and rising competition due to sluggish growth; and (iv) recoveries could be the silver lining, which are guided to be better than FY12. With relatively higher slippage run-rate in H2FY12, BOB’s outperformance on asset quality is now narrowing down the gap with peers. Also, management change remains an overhang in the near term. We maintain ‘HOLD’.
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Asset quality: Stress continues; FY13 slippage guidance at ~1.3%
Tough environment is keeping any meaningful asset quality improvement at bay. Post previous two quarters of increased slippages (1.8% for H2FY12), Q1FY13 is also likely to reel under pressure. For FY13E, BoB it is guiding for 1.3-1.4% slippage run rate, unless the economy deteriorates further (we are conservative in our assumptions with 1.5-1.7% run rate). Restructuring will continue given pending cases of UP (likely in Q1FY13E), Punjab SEBs and CDR cases further adding to the pool. However, the bank does not expect increased slippages from the outstanding cumulative restructured book (at 5.25% of advances). There is not much clarity on the BK Chaturvedi Commiitee’s proposed SEB restructuring package and consequent NPV hit.
Outlook & valuation: Top deck change overhang; maintain ‘HOLD’
Over the past two quarters, worsening macroeconomic condition has led to deterioration in BoB’s asset quality (slippages breaching guided range of 1.2-1.3%), narrowing the gap with peer set, leading to the stock underperforming the bankex (~20% over past six months). In Q4FY12, despite higher slippages at 2% and increased provisioning coverage at 80%, earnings gained support from few offsetting factors like investment depreciation reversal, tax write-back and income tax refund. In the absence of these offsetting factors, higher slippages in Q1FY13 can act as a drain on profitability. Management change is also an overhang in the near term. The stock trades at 1x FY13E ABV and we maintain ‘HOLD/Performer’ recommendation/rating.
Regards,
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