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Bank of Baroda (BOB)
Banks/Financial Institutions
Strong topline performance. Bank of Baroda (BoB) delivered strong net interest
income on the back of healthy (24%) loan growth and almost stable NIM (qoq
improvement of 20 bps). Lower treasury income and higher loan-loss provisions
moderated growth in net earnings. We revise estimates downwards to factor somewhat
lower loan growth, fees and higher provisions. Retain BUY with price target of `1,100
(`1,250 earlier). The stock is trading at 1.2X PBR and 6X PER FY2013E.
Strong margin expansion and stable asset quality trends positive
BoB delivered another strong quarter with NIM expanding 20 bps qoq (loan re-pricing) and
impressive asset quality trends with very negligible slippages (1% annualized). NII grew 27% yoy
(12% qoq) while operating expenses grew by 9% yoy. Loan-loss provisions were high as the bank
chose to write off loans to the tune of 0.7%, resulting in a marginal decline in gross NPLs qoq. Fee
income trends were weak as the corporate loan activity has slowed.
We maintain our BUY recommendation but revise our TP to `1,100 (`1,250 earlier) to factor lower
growth, slower fee income growth and higher provisions. We expect the bank to deliver 8%
earnings CAGR and RoEs in the range of 19-20% levels for FY2011-13E. Sharper-than-expected
deterioration in the underlying macro environment remains a key risk as loan-loss provisions are at
70 bps levels for FY2011-13E.
Loan growth strong at 24%, CASA ratio stable
BoB reported loan growth of 24% in September 2011—this compares with 25% growth in June
2011 and 30% in March 2011. The domestic business showed signs of moderation (domestic
loans grew by 19% yoy as compared to 24% in June 2011) while international business remained
buoyant (loans growth of 37% yoy) aided by currency movement. The share of retail loans has
declined by 200 bps over the last one year largely replaced by SME and international loans.
Overall deposits grew by 22% yoy with domestic deposits growing by 19% yoy. CASA in the
domestic business was flat qoq at 34%. CD ratio for the quarter moderated to 73% from 74% in
June 2011.
NIM remains strong at 3.1% led by stable cost of funds
BoB reported 10 bps yoy and 20 bps qoq rise in NIM to 3.1% (KS calculated NIM was 2.8%). NIM
in the domestic business was strong at 3.7% (30 bps improvement qoq) led by loan re-pricing (90
bps qoq) while the international business reported flat margins for the quarter. We build some
moderation in our overall NIMs (25 bps in FY2012E) as ability to pass lending yields (12%) from
current levels would be limited.
Non-interest income moderate, treasury income down
Non-interest income was up 8% yoy to `7.7 bn largely due to fees from forex loans and
recoveries from bad loans. Core fees income was down 7% yoy due to weakness in
corporate activity. Treasury income which had 16% contribution to fees in 2QFY11 was
negligible during the quarter, largely pulling down growth in overall fee income. On a low
base, we are modeling 14% growth in core fees over the next two years.
Slippages at 1%, NPL write-offs pull down reported earnings
BoB reported slippage of 1%—stable qoq. Write-offs in 2QFY12 were of 0.7% of advances
(as compared to 0.2% in 1QFY12) thereby driving its credit cost (up 125% yoy). After the
write-off, gross NPL ratio was stable at 1.4% and net NPL at about 0.45%. We note that the
NPLs in the SME (segment where the bank has increased loan growth in recent quarters) and
agriculture portfolios have increased sharply over the past few quarters. About 12% of the
restructured loans slipped into NPLs; whole sale loans continued to have large (57%)
contribution to restructured loans (3% of advances).
In light of the challenges in the operating environment, we are raising our loan-loss
provision estimates from 0.6% to 0.8% loans for FY2012-14E (as compared to 0.6% for last
five years) and 0.5% estimated earlier. We are building slippages at 1.4% levels in FY2012E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bank of Baroda (BOB)
Banks/Financial Institutions
Strong topline performance. Bank of Baroda (BoB) delivered strong net interest
income on the back of healthy (24%) loan growth and almost stable NIM (qoq
improvement of 20 bps). Lower treasury income and higher loan-loss provisions
moderated growth in net earnings. We revise estimates downwards to factor somewhat
lower loan growth, fees and higher provisions. Retain BUY with price target of `1,100
(`1,250 earlier). The stock is trading at 1.2X PBR and 6X PER FY2013E.
Strong margin expansion and stable asset quality trends positive
BoB delivered another strong quarter with NIM expanding 20 bps qoq (loan re-pricing) and
impressive asset quality trends with very negligible slippages (1% annualized). NII grew 27% yoy
(12% qoq) while operating expenses grew by 9% yoy. Loan-loss provisions were high as the bank
chose to write off loans to the tune of 0.7%, resulting in a marginal decline in gross NPLs qoq. Fee
income trends were weak as the corporate loan activity has slowed.
We maintain our BUY recommendation but revise our TP to `1,100 (`1,250 earlier) to factor lower
growth, slower fee income growth and higher provisions. We expect the bank to deliver 8%
earnings CAGR and RoEs in the range of 19-20% levels for FY2011-13E. Sharper-than-expected
deterioration in the underlying macro environment remains a key risk as loan-loss provisions are at
70 bps levels for FY2011-13E.
Loan growth strong at 24%, CASA ratio stable
BoB reported loan growth of 24% in September 2011—this compares with 25% growth in June
2011 and 30% in March 2011. The domestic business showed signs of moderation (domestic
loans grew by 19% yoy as compared to 24% in June 2011) while international business remained
buoyant (loans growth of 37% yoy) aided by currency movement. The share of retail loans has
declined by 200 bps over the last one year largely replaced by SME and international loans.
Overall deposits grew by 22% yoy with domestic deposits growing by 19% yoy. CASA in the
domestic business was flat qoq at 34%. CD ratio for the quarter moderated to 73% from 74% in
June 2011.
NIM remains strong at 3.1% led by stable cost of funds
BoB reported 10 bps yoy and 20 bps qoq rise in NIM to 3.1% (KS calculated NIM was 2.8%). NIM
in the domestic business was strong at 3.7% (30 bps improvement qoq) led by loan re-pricing (90
bps qoq) while the international business reported flat margins for the quarter. We build some
moderation in our overall NIMs (25 bps in FY2012E) as ability to pass lending yields (12%) from
current levels would be limited.
Non-interest income moderate, treasury income down
Non-interest income was up 8% yoy to `7.7 bn largely due to fees from forex loans and
recoveries from bad loans. Core fees income was down 7% yoy due to weakness in
corporate activity. Treasury income which had 16% contribution to fees in 2QFY11 was
negligible during the quarter, largely pulling down growth in overall fee income. On a low
base, we are modeling 14% growth in core fees over the next two years.
Slippages at 1%, NPL write-offs pull down reported earnings
BoB reported slippage of 1%—stable qoq. Write-offs in 2QFY12 were of 0.7% of advances
(as compared to 0.2% in 1QFY12) thereby driving its credit cost (up 125% yoy). After the
write-off, gross NPL ratio was stable at 1.4% and net NPL at about 0.45%. We note that the
NPLs in the SME (segment where the bank has increased loan growth in recent quarters) and
agriculture portfolios have increased sharply over the past few quarters. About 12% of the
restructured loans slipped into NPLs; whole sale loans continued to have large (57%)
contribution to restructured loans (3% of advances).
In light of the challenges in the operating environment, we are raising our loan-loss
provision estimates from 0.6% to 0.8% loans for FY2012-14E (as compared to 0.6% for last
five years) and 0.5% estimated earlier. We are building slippages at 1.4% levels in FY2012E.
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