BoB-Diversified growth; retail, SME focus; high maturity mismatch :: Motilal Oswal

Diversified growth; retail, SME focus; high maturity mismatch
FY12 Annual Report highlights
 Diversified growth across sectors, with the share of various segments remaining largely
stable. Focused strategies on SME segment leading to continued strong growth.
 Asset quality has deteriorated, but remains better than peers. Healthy profitability
has helped BOB to maintain provision coverage ratio (PCR) at 80%+.
 Discounting factor for pension liability calculation increased by 25bp, in line with
hardening of interest rates. Significant build-up of foreign currency translation reserves
(INR16.9/share) due to currency depreciation.
 Given the continued asset quality pressures and expected fall in return ratios, we
maintain our Neutral rating.

��


Diversified growth across industries; focused strategy for SME segment: Bank of
Baroda’s (BOB) fund based exposure details reveal diversified growth in line
with overall domestic credit growth across industries. Fund based exposure to
Iron and Steel (6.4%), Textiles (4.7%), Gems and Jewelry (0.5%) and Infrastructure
(14%, down 120bp YoY) remains stable. Exposure to Power segment remained
stable in absolute terms YoY at INR143b (7% of total exposure), of which INR68b
is for transmission and distribution. Addition of 10 new SME loan factories and 8
specialized SME branches, and focused strategies have ensured continuance of
strong growth momentum in SME loans (25%+ YoY).
Asset quality deteriorates, but better than peers: Net slippages have increased
from 0.7% a year ago to 1.1% (highest since FY04). Large ticket government entity
related restructuring led to sharp increase in restructured loans to 6.5% of loans
v/s 4.2% a year ago. The outstanding restructured loans should also be viewed in
the context of strong loan CAGR of 28% over FY10-12. In percentage terms, GNPAs
have increased across segments (except Industry) in FY12.
Other highlights
 Led by significant rupee depreciation, BOB reported foreign currency
translation reserve of INR6.97b (265bp of net worth), amounting to
INR16.9/share. We have adjusted this while calculating the book value.
 Discount rate assumption for pension liability up to 8.75% v/s 8.5% in FY11.
 High maturity mismatch – 66% of deposits and 43% of loans maturing in FY13.
 Commercial Real Estate exposure declined to 2% of loans v/s 2.7% a year ago.
 Wholesale banking sanctions declined by 22% in FY12.
 Core tier-I ratio increased to 10.1% v/s 9.1% a year ago.
Return ratios may deteriorate; Neutral: BOB continues to deliver strong business
growth and margins. However, fee income growth remains volatile. The bank’s
overall restructured loans are now in line with peers at 6.5% of loan book.
Domestic restructured loans stand at ~7.5% of the loan book (5.2% excluding Air
India and SEBs). While valuations are reasonable, they need to be seen in the
context of expected deterioration in RoA/RoE in FY13/FY14. Maintain Neutral.