Bank of Baroda (Update) : Best amongst peers. Maintain BUY ::HDFC Sec, link

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--> Best amongst peers
Key highlights from our interaction with Bank of
Baroda’s (BOB) management are as follows:
(1) Impairments to be higher vs. 2Q (Rs 32bn) led by
rise in restructuring. (2) Loan growth to match
industry avg. of ~13-15% by Mar-15. (3) NIM (2Q:
2.4%) expected to remain largely stable. (4) With
higher wage hike provisions (15%) and relatively
lower pension discounting rate (8.5%), BOB is better
placed vs. peers. Management hinted that a 100bps
downward revision in discount rate would lead to Rs
2.5bn additional pension cost. (5) The decline in
yields, management hinted for better treasury gains
and MTM reversals in the equity book (hit of Rs 1.8bn
in 2Q) which should provide a cushion to earnings.
Amongst PSBs, BOB continues to stands out, given
high tier I at 9.3%, improving granularity within B/S
and lower impaired ratio. Further, we believe BOB’s
asset quality is likely to peak ahead of its peers,
given that it has a relatively better credit
underwriting. BOB trades at 1.1x FY17E ABV with an
ROA of 0.8%. Maintain BUY and revise TP to Rs 1,167
(1.2xFY17E ABV).
 Impairments to rise, but within manageable levels :
With no signs of improvement in macros, BOB’s
management hinted for a rise in impairments. Slippages
are expected to remain elevated at ~Rs 20bn vs. Rs
18.5bn (1.9% ann. in 2Q). Further, restructuring is
expected to increase on a sequential basis (Rs 12bn in
2Q). As on Sept-14, bank’s restructured book stood at
Rs 224bn (5.8% of loans). We remain positive on BOB’s
asset quality improvement vs. peers given its diversified
loan book, relatively lower exposures towards riskier
segments and presence in the faster growing states.
The recent RBI guidelines on refinancing would not only
reduce the large incremental impairments but also put
to rest apprehensions about rising slippages from
restructured pool. We have factored slippages of 1.6%
over FY15-17E vs. ~2.1% in FY13/14.
 Business to remain moderate with steady NIMs : BOB’s
management continued to guide for a steady loan
growth (13-15%) with a continued rise in SME (22%) &
Retail (18%) loans along with moderate growth in the
large corp book. As on Sept-14, the bank’s foreign book
stood at 33%, which is expected to remain at similar
levels. We believe BOB is relatively better placed with
higher CRAR of ~12.2%. We have factored 16% loan
CAGR over FY14-17E. In 2Q, BOB positively surprised
with a NIM improvement of 5bps QoQ. However,
management indicated that NIMs would remain flattish
given the marginal rise in slippages, lower demand and
lag effect of the recent reduction in deposits rates. We
have factored NIMs of 2.15% over FY15-17E.

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010452