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Bank of Baroda (BOB IN) Rating:1
2Q FY11 results: fresh NPLs decline, NIM improves
What has changed?
• The 61% YoY net-profit rise for 2Q FY11 was above our and market forecasts.
Both loans and deposits rose by almost 30% YoY, the domestic net interest margin
(NIM) of 3.62% rose 19bps QoQ and fresh NPLs fell sharply quarter-on-quarter.
Impact
• Bank of Baroda’s net-profit increase of 61% YoY for 2Q FY11 was driven
mainly by a high increase in its net interest income (NII) of 47% YoY. Noninterest
income rose by only 14.4% YoY, as treasury income declined by 8.5%
YoY. However, fee-based income rose by a robust 24% YoY, with core fee
based-income up by 29.3% YoY, in line with the overall loan growth.
• Fresh formation of non-performing loans (NPL) declined substantially for 2Q
FY11 to Rs2.8bn, compared with Rs6.39bn for 1Q FY11, with incremental
delinquency of just 0.16% for 2Q FY11, one of the lowest levels in the industry.
Gross NPLs were Rs27.19bn and increased by only Rs0.62bn for 2Q FY11,
even as net NPLs at Rs7.31bn rose by only Rs0.13bn.
• The overall NIM stood at 3.02% for 2Q FY11, an improvement of 10 basis
points QoQ. The domestic NIM was 3.62%, an increase of 19bps QoQ, while
the overseas NIM was 1.33%, up by 2 basis points QoQ. The bank has not yet
estimated its pension-related liabilities, so has not started providing for them.
We have, however, built pension-liability related provisions into our FY11 and
FY12 forecasts.
Valuation
We have revised up our FY11 and FY12 EPS forecasts by 8.1% and 7.3%,
respectively, as we now forecast higher NII growth than previously. We have
raised our six-month target price by 11% to Rs1,146 from Rs1,029, at a PBR of
2x on our FY12 forecasts to account for our higher earnings forecasts (from a
previous 1.9x PBR), based on our Gordon growth model.
Catalysts and action
• We maintain our 1 (Buy) rating on Bank of Baroda. Lower fresh NPLs and
higher recoveries for 2Q FY11 compared with the previous quarter are likely to
be the key catalysts, in our view.
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