Bank of Baroda: 2Q FY11 — Surprise! No surprises: HSBC

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Bank of Baroda (BoB)
N: 2Q FY11 — Surprise! No surprises
􀀗 2Q profit grows 61% YoY with higher growth and margins
and no negative asset quality surprises
􀀗 We raise our earnings by 11% for FY11 and 14% for FY12 as
higher credit cost estimates have not materialised
􀀗 Remain Neutral (remove V flag), raise target price to
INR1,070 (from INR789), implying 8% potential return




2Q FY11 results: BoB reported PAT growth of 61% YoY to INR10.2bn, higher than our as
well as street estimates mainly due to lower than expected credit costs. While loan and
margin expansion was on expected lines, BoB surprised positively on its robust asset quality
as against other PSU peers that have disappointed this quarter on this front.

Key themes: BoB’s strong run on loan growth, healthy margins and robust asset quality
continued to be its key profit growth drivers. In 2Q, loan growth remained higher than
industry at 30% YoY and 10% YTD with margins expanding 12bp QoQ to 3.02%. Despite
strong deposit growth of 12% YTD, BoB has been able to keep its funding costs largely
stable, which supported margin expansion. Gross NPLs also remained stable at 1.4% with
slippages at just 1.05% in 1H, which is significantly lower than its other peers.

Expectations and outlook: Going forward, with ample liquidity given relatively lower
LDR, we believe BoB will be in a position to grow its loan book at a higher pace, without
pressure on margins. Also, with its robust asset quality surprising us and management
indicating no further pressures given the earlier shift to computerised systems, negative
surprises are likely to be less. We are raising our earnings estimates by 11% for FY11 and
14% for FY12 as we now build in lower loan loss provisions, while broadly maintaining
our estimates on growth, margins and costs. We introduce FY13 estimates also.

Valuation and risks: Our revised 12-month target price is INR1,070. We continue to
value BoB using a weighted average combination of PE, PB and EPM methodologies. For
PE and PB we set the target multiples after examining historical trading patterns and
hence use 12-/24-month forward EPS and BV to value the same. Accordingly, we value
BoB at 7.7x PE and 1.3x PB. At these multiples, BoB would be trading at its second
highest historical multiples with a 10% premium on PE basis and at a par on PB basis
relative to its peers. Given better earnings’ visibility and significantly lower NPL issues,
we expect the stock to sustain these valuation multiples. However, these premium
multiples and BoB’s significant YTD outperformance versus peers result in a potential
return of just 8%. Key upside risks: 1) Negative asset quality surprises and 2)
Unascertained pension liability. Key downside risk: Chairman retiring in FY13.