Bank of Baroda (BOB.BO)
3QFY13 Results: Is it the ‘Kitchen Sink’?
The market did shout about it — BOB’s Chairman was going to retire in
November 2012 (after a remarkable five-year business and stock run); and the
market and most analysts (not us) expected a kitchen sink (big NPA / other problem
pop) when the new Chairman took over (a rather consistent PSU bank
characteristic). It’s turned out that way (-8% stock drop). But a ‘Kitchen Sink’ also
suggests a one-time cleaning up (often with better stock days beyond) – so is it
really a ‘Kitchen Sink’?
What’s so dirty that it requires cleaning up? — It’s a mix: a) Profits down 22%
yoy, a 30% estimates miss (lower trading gains, higher P&L provisioning); b) NPLs
up 25% qoq, restructurings accelerating (3% annualized) – ahead of other PSU
Bank reports this quarter; c) Margins down 6bps qoq – weaker than a few peers; d)
New Management guidance – ‘couple of quarters before things stabilize’ (more
problems – or just lowering expectations). It’s a poor mix – and the market was
hoping that this kind of thing would not happen, given revived investing spirits.
What’s still Ok — A -8% day often tends to cloud other things: that BOB has
among the most-hedged balance-sheets among India banks (33% of BS is offshore),
loan loss coverage levels are reasonable (71%), overall NPL levels are still
better than the average PSUs (2.4%, gross; 7.7% restructuring), it’s got capital (Tier
1 at 10%+, and the Govt. is giving it more) and that management is also setting
forth reasonable expectations: on growth – 15%; margins – 3%+; on asset quality –
might take a couple of quarters to recover (this is also part of the disappointment).
This does not offset the quarter’s problems; but the stock does trade at 0.9x PBV.
PSUs are average businesses - but the market does tend to over-react — We
see the quarter, management’s cautious guidance and a fundamentally challenging
environment as overhangs on the stock. That said, some cushion on valuations, the
recent PNB round–trip (crushed expectations, and then a relief bounce), and
reasonable valuations, suggest there’s probably a little more to gain than lose
holding the stock at these levels (maintain Buy, with an EVA-based target price of
Rs900). However, we wouldn't expect a bounce in the immediate term.
