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Bank of Baroda
Good 2Q results, upside may
be limited; Maintain Neutral
Raise PO to Rs1030; Neutral on weaker 2H, valuations
We raise our PO to Rs1030 post strong operational 2Q earnings. But we maintain
Neutral, as we expect 2HFY11 earnings growth may decelerate (yoy) as pension
costs (est. at Rs4bn/yr.) get crystallized, which BOB has not accounted for to
date. We have raised our earnings by 2/3% for FY11/12E but still estimate growth
at <15% in FY11 (vs. +35% earlier). Hence, we believe BOB to continue to trade
at +1.9-2.0x FY12 book, which is a ~10% premium to theoretical multiples, owing
to sustainable improvement in return ratios (RoEs at ~23% in FY12).
Earnings stronger than est. on topline and fees
BOB reported earnings of Rs10.2bn, +60% yoy growth and +25% higher than est.
More importantly, operational results have been strong with topline growth (47%
yoy; 6% ahead of est.) driven by loan growth of 30%. However, unlike most other
banks, BOB has not made any pension provisions so far. Loan growth driven by
SME segment. Margins also expanded 39bps yoy to +3.0% (up 12bps qoq). Core
fee growth at +20% yoy. CASA flat at 35% yoy.
NPLs manageable; slippages under check
Headline NPLs increased only 2% each (gross and net) qoq. Provision coverage
at +82%. More importantly, slippages are down to Rs2.9bn vs. Rs6.6bn in
1QFY11. Delinquency (annualized) ratio at <1.1% vs. 1.2% in FY10. Total
restructured loans at Rs54bn (2.8% of loans). Of this total, Rs5.4bn (~10% of rest.
book) has slipped in to NPLs.
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