Bank of Baroda 2QFY11 – Strong growth, buy:: Anand Rathi

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Bank of Baroda
2QFY11 – Strong business growth, NIM improves; Buy
 Raising target price; retain Buy. Bank of Baroda’s 2QFY11
profit rose 60.7% yoy, driven by impressive net interest income
(NII) and better productivity. Due to better NIM assumptions, we
raise FY11e/12e EPS 10%/10.7%. On better RoEs, we value the
stock at 1.9x FY12e BV (1.5x FY11e BV earlier) and raise our
target price to `1,208 from `897. The high CASA share, strong
fee-income-growth potential and high NPA coverage make it our
preferred pick among PSU banks. Maintain Buy.
 Margins led by CASA growth; fees improve. Domestic CASA
grew 27.3% yoy, its share in deposits remaining stable at ~36%,
aiding NIM expansion of 39bp yoy to 3.6%. We expect NII to
grow 36.8% in FY11 and 33.6% in FY12. Fee growth (29.3% yoy)
was in line with credit growth (29.6% yoy). We expect fee income
growth to be helped by a recovery in loan disbursements.
 Asset quality fine; NPA coverage high. Gross NPAs rose 2.3%
qoq, but the NPA coverage at 73.1%, was one of the highest in
the sector; including technical write-offs, it was 85.6%. The bank
has contained slippages below its target of 1.25% for the past six
quarters. Capital adequacy was sufficient at 14.3%, with tier-1
capital at 9.2%.
 Valuation. At our target price of `1,208, BoB would trade at a
PABV of 2x FY12e and 1.6x FY13e. Risks: Slower accretion in
low-cost deposits, leading to NIMs being lower than estimated;
higher credit costs due to lower-than-expected NPA recoveries.