Bank of Baroda : Near term pain to stay; relatively stable :: ICICI Securities, report

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Near term pain to stay; relatively stable • PAT came below our and Street estimates at | 333.9 crore, down 68% YoY vs. our estimate of | 1228 crore, due to higher provisions relating to tax (additional tax levied by Dubai Tax authority of | 410 crore) and asset quality (ad hoc incremental provision of | 340 crore) • The asset quality worsened with absolute GNPA increasing by | 2395 crore QoQ to | 15453 crore (GNPA -3.85% vs. 3.3% QoQ). NNPA stood at 2.1% against 1.74% in Q2. Additions to RA were | 1598 crore while slippages amounted to | 3042 crore vs. | 1758 crore in Q2 • Even on the operational front, growth was below our estimates with PPP increasing a mere 6.4% YoY to | 2414 crore due to 3.4% QoQ decline in NII to | 3286 crore (up 7.5% YoY). Domestic margins dropped to 2.9% due to higher interest reversals on lumpy slippages Consistent credit growth makes BoB second largest Indian bank Traditionally, BoB was the third largest bank in India but has climbed up to second position during FY14 on the back of consistent credit growth. BoB has grown its credit at a healthy 22.6% CAGR from | 143251 crore in FY09 to | 397006 crore in FY14. The loan book increased by | 253754 crore in FY09-14 of which international credit was the major contributor (| 90001 crore). Besides, SME contributed | 40588 crore, retail- | 25529 crore, agri- | 10797 crore, corporate & others- | 85971 crore. With the rupee expected to stabilise, BoB is not expected to outpace industry credit growth. We have revised our credit estimate lower to 11.6% CAGR to | 494249 crore over FY14-16E. Strong liability franchise to support 2.2% global NIM, 2.9% domestic NIM BoB has a pan-India presence with a wide network of 5054 branches. Of these, 29% branches (~| 1464 branches) are in Gujarat and Maharashtra, which are CASA rich states and have higher industrial activity. The domestic CASA ratio of BoB has been stable at 32% over FY12-14, which is expected to be maintained for FY15E, FY16E supporting the domestic NIM of ~2.9%. The global NIM is low at 2.2% as the bank earns only ~1.1% NIM on its overseas loan book (33% of total credit). We have lowered global NIM estimates range to 2-2.2% from 2.2%-2.4% earlier. Well-diversified loan book contains asset quality on relative basis The loan book of BoB is well-diversified with overseas book of | 132717 crore (33%). Sectors: SME- | 59320 crore (23%), retail- | 48736 crore (19%), agriculture- | 35335 crore (14%), corporate - | 94713 crore (36%) of domestic loans. Diversified exposure has contained the asset quality of BoB compared to peers, which have GNPA ratio of 4%+ & RA of 8%+. However, during Q3FY15, slippages came in higher. Hence, BoB’s GNPA ratio rose to 3.85% (| 15453 crore) while its RA stood at | 23099 crore (5.9% of credit). We have revised our estimate for GNPA ratio higher to 3.7% (| 18842 crore) by FY16E. Near term NPA pressure will continue. Revise estimates lower on NPA concerns in near term; maintain BUY BoB’s operational performance was healthy until Q3FY15, wherein NPA pressure, falling business traction & margins impacted its performance. We believe the stock may stay under pressure in the near term as concerns on aforesaid parameters are unlikely to abate soon. Hence, we have lowered our earnings estimates. We roll over to FY17E ABV, revise its premium multiple lower to 1.2x and assign TP of | 210. The bank still has an advantage over its peers in terms of well diversified book, healthy capital adequacy, PCR and CASA profile. Hence, we maintain BUY.

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