Bank of Baroda -Best-in-class return ratios to drive stock : Religare

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Bank of Baroda
Best-in-class return ratios to drive stock performance
Bank of Baroda (BOB) performed remarkably well on all key operating
parameters in Q2FY11. NII grew by ~47% YoY (or 10% QoQ) driven by a
strong 30% YoY growth in advances and a 39bps YoY (or 12bps QoQ)
expansion in NIMs. Core fee income was also strong at 24% YoY. Asset quality
was robust with fresh slippages only at 0.8% (annualised) as against 1.9% in
Q1FY11 and 1.2% in FY10. Consequently, provisions towards NPA declined by
17% QoQ and 49% YoY. PAT jumped 61% YoY and 19% QoQ to Rs 10.2bn.
We are upgrading our earnings estimates by 5.1/5.4% for FY11/FY12 to factor
in the above-expected growth in advances, better-than-expected NIMs and
lower credit costs. The bank is still waiting for actuarial estimations of second
pension liabilities and therefore has not made provisions towards the same.
While operating expenses could increase in the coming quarters (we are also
factoring in higher employee expenses), its impact on profitability would not be
significant given the bank’s strong operating performance. We believe that BOB
should trade at a premium to other nationalised banks due to its consistent
performance and best-in-class return ratios. Maintain BUY with a revised price
target of Rs 1,180 (2.1x FY12E BV and 9.4x FY12E EPS).

Credit growth broad-based; asset re-pricing supports domestic NIMs: Domestic
advances grew 29% whereas international advances 30% YoY during the quarter.
Growth was broad-based with retail/SME segments growing 27%/41% YoY (Fig
5). Deposits too grew by 30% YoY while CASA was stable at 35% (Fig 7). NIMs
from international operations expanded ~12bps as domestic margins surged
19bps QoQ due to a 38bps QoQ increase in yield on advances (Fig 10).
Asset quality healthy: Fresh slippages dropped to Rs 2.9bn from Rs 6.7bn in
Q1FY11 (Fig 4); consequently, NPA provisions declined by 17% QoQ and 49%
YoY (Fig 9). Gross NPAs, in percentage terms, slid from 1.41% in Q1FY11 to
1.39% in Q2FY11 (Fig 3). Provisioning coverage ratio (without write-offs) was
stable at 73%. Including write-offs, this ratio stood at ~86%. The bank has
restructured assets worth Rs 54bn (2.8% of advances), of which ~10% have
already slipped into NPAs.
Robust growth in fee income; costs stable: Other income grew by 14% YoY led
by a robust 24% YoY growth in fee income. With this, growth in core fee income
averaged at ~14% YoY for H1FY11. C/I ratio remained stable QoQ (as against a
significant increase for other PSU banks) since BOB did not make any provisions
towards second pension liabilities. However, we expect this ratio to increase
going forward, as the bank starts providing for second pension liabilities from the
next quarter onwards.