Bank of Baroda - "Core performance remains strong" ::LKP

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Key highlights

Ø  BoB reported PAT growth of 20% yoy Q1FY12. NII and PAT for Q1FY12 were inline with our full estimates for FY12.

Ø  Advances of the bank grew by 25%/2.1% yoy /qoq. Domestic credit grew by 24%/(0.5)% yoy/ qoq driven by growth in SME by 31%/3.7% yoy/qoq and retail 24%/(4.6)% yoy/qoq. Management has guided that the bank will grow advances 200-300 bps ahead of industry growth. However, the traction in loan book seen in previous years is likely to slow due to lower sanctions in FY12. Further increase in lending rates beyond its July 2011 base rate hike is likely to moderate credit demand.

Ø  The bank’s deposit grew by 23%/2.5% yoy/qoq while CASA grew 17%/(0.4)% yoy/qoq. The bank maintained CD ratio ~74% and CASA share of ~28%. However, the outlook and trend in domestic CASA does show a possibility of pressure on CASA share. 

Ø  NIMs for Q1FY12 were 2.9% v/s 2.9%/3.1% yoy/qoq (Q4FY11 NIMs adjusted for tax refund). Higher cost of funds and lower pass on through yields on the domestic book has resulted in lower NIMs qoq. The bank has raised deposit rates by 100bps in Q4FY11 and base rate by 75bps in Q1FY12 and subsequently in July 2011. Thus we expect the impact to show up in Q2FY12 NIMs. Going forward we expect NIMs to remain under pressure as monetary policy tightening continues.

Ø  Gross npas have increased by 29%/9% yoy/qoq and net npas by 43%/30% yoy/qoq. As a percent also the gross and net npas were 1.46% v/s 1.36%/1.41% yoy/qoq and 0.44% v/s 0.35%/0.39% yoy/qoq. However, the bank continues to maintain a 85% PCR and has maintained slippages under 1%.  BoB restructured loans worth Rs.4.5 bn in Q1FY12, taking restructured assets to 3.1% v/s 2.9% qoq. Slippages in the restructured book 12.5% of the restructured assets by Q1FY12. The management has guided npas to be maintained at current levels. However, we remain slightly cautious on slippages and restructured portfolio over the near term.

Ø  Overall non-interest income grew by 3.8%/(23%) yoy/qoq. Fee income showed a robust growth of 28% yoy. However, lower trading gains (42% yoy) and lower recovery income (49% yoy) dragged the overall income growth lower. The management has guided for continued traction in fee income over FY12.

Ø  C/I ratios was 38% v/s 38%/44% yoy/qoq (higher employee provisions resulted in higher Q4FY11 C/I ratio). In Q1FY12 the bank amortised Rs.915 mn towards past employee retirement benefits.

Ø  BoB has taken over The Menon Co-operative Bank and charged deficit of Rs.130 mn during the quarter (Rs.1.4 bn to be amortised over three years).

Ø  The bank delivered on core performance and strong fee income despite the current macro and monetary environment. Although slippages remained below 1% we remain cautious on the increase in npas over the near term. Currently, BoB trades at a P/ABV of 1.5x FY12 and 1.2x on FY13. We maintain our P/ABV multiple at 1.5x FY13E ABV and our target price of Rs.1,086 per share. BUY.