Bank of Baroda : BUY

Asset Quality Disappoints

Bank of Baroda (BoB) reported PAT of Rs 12.9 bn (up 57% YoY), above our expectations, led by strong core income and lower taxes. Net interest income rose 50% YoY led by advances growth of 31% YoY and margin expansion of 48 bps YoY. Margins also impressed sequentially (up 25 bps), driven by improvement in domestic margins. Core fee income impressed with 24% YoY growth. Tax expenses were lower (down 82% YoY), due to higher provisioning made in earlier quarters and income tax refund (~Rs 480 mn adjusted in Q4FY11). Slippages for the year were at ~1.1%. Gross and Net NPAs were up by 31% YoY during the quarter, however, provisioning coverage improved marginally to 75%. 

Key highlights

• Credit growth (31% YoY) was led by overseas credit (up 37% YoY) and domestic retail loan growth (up 34% YoY). Domestic CASA ratio came-off a bit to 34.4% (from 35% in Dec-10), as a result of higher growth in term deposits during the quarter.  
• During FY11, BoB has provided Rs 3.65 bn on a/c of pension liability of existing employees & 100% of such liability of Rs 5.5 bn towards retired employees. The remaining pension liability for existing employees (of Rs 14.6 bn) is to be provided equally over next 4 yrs.
• C/I  ratio  increased  to  44%  (38%  in  Dec-10)  led  by  higher  staff expenses (up 86% YoY), which rose due to additional burden of pension and gratuity liabilities.

Maintain BUY with revised TP of Rs 1,065  

BOB maintained strong growth momentum (total business up 28% YoY), with advances and deposits growing equitably. Despite higher slippages, mgmt seemed confident of maintaining strong asset quality going forward. We have revised our EPS estimates upwards by 9% for FY12E. On the back of healthy growth rates, strong margins and higher return ratios, we reiterate our BUY rating with a TP of Rs 1,065 (1.8x FY12E ABV and 8x FY12E EPS) – upside of 17% from CMP of Rs 916.