[Investors Please Listen] Bank of Baroda : Tough quarter gone by: Recommendation: Hold Price target: Rs444 Current market price: Rs417

Cluster: Apple Green

Result highlights

• For Q1FY2010 Bank of Baroda (BoB) has reported a bottom line of Rs685.4 crore, up 85% year on year (yoy). The growth, despite a weaker top line growth, was mainly driven by strong treasury gains and the write-back of marked-to-market (MTM) provisions made earlier.
• The net interest income (NII) for the quarter stood at Rs1,204.7 crore, up a weak 14.0% yoy but down 18.1% quarter on quarter (qoq). The NII growth was weaker than expected, despite a strong advances growth, primarily due to a 23-basis-point year-on-year (y-o-y) contraction in the calculated net interest margin (NIM) to 2.08%.
• The sharp sequential contraction in the NIM primarily stemmed from a 50-basis-point cut in the prime lending rate (PLR) implemented by the bank with effect from April 01, 2009. The reduction in the cost of deposits is likely to show its impact with a lag. Moreover, the bank booked income from tax refund as interest income in the previous quarter, thereby boosting its NIM in the previous quarter. 
• The non-interest income grew significantly by 37.2% yoy to Rs703.0 crore, mainly driven by a 180.2% y-o-y jump in the treasury gains. Notably, the income from commission, exchange and brokerage grew by robust 28.9% yoy while the growth in the income from foreign exchange (forex) transactions, recoveries and incidental charges remained subdued during the quarter.
• The operating expenses during the quarter grew by 16.7% yoy to Rs897.8 crore, as the staff expenses and the other operating expenses rose by 13.7% yoy and 23.1% yoy respectively. During the quarter the bank made provision of Rs45.1 crore towards AS-15 while Rs75 crore was provided towards wage hike arrears.
• The provisions for the quarter shrank sharply and in fact, at the net level, the bank wrote back Rs39 crore worth of provisions. Dissecting the provisions further, it becomes evident that the dip was led by the write-back of Rs360 crore worth of investment depreciation provisions. Importantly, the bank utilised treasury gains to shore up loan loss provisions (up 113% sequentially to Rs304.4 crore).
• The asset quality of the bank deteriorated sequentially during the quarter. The gross non-performing assets (GNPA) increased by 12.2% qoq to Rs2,068.2 crore, with the GNPA in percentage terms inching up by 17 basis points qoq to 1.44%. However, the net non-performing asset (NNPA) declined by 16.1% qoq as the bank netted floating provision of Rs550.4 crore against the GNPAs. The resulting provisioning coverage stood at 81.7%, much better than 75.5% during the previous quarter. However, the majority of the accretion in the GNPA is likely to get reversed, since the bank expects the bulk of the incremental non-performing asset (NPA) to get upgraded as standard accounts in the current quarter.
• During the quarter, the bank restructured loans worth Rs1,596 crore, in line with the amount of applications pending as on March 31, 2009. Consequently, the bank has restructured total loans worth Rs4,255 crore, which constitute ~4% of the bank's total domestic advances. Dissecting further, ~80% of the incremental loans restructured are from the corporate segment, while the rest are from small and medium enterprise (SME), retail and agri segments.
• At the end of Q1FY2010, the advances grew by a robust 28.3% yoy to Rs142,672 crore, while the deposits rose by 28.2% yoy to Rs198,609 crore. Importantly, the current and savings account (CASA) ratio was stable at ~35% during the quarter on a sequential basis. 
• The bank's capital adequacy ratio (CAR; Basel II) improved to 14.56% on June 30, 2009 from 14.05% in the previous quarter. Out of this 14.56%, the share of tier-I capital was 8.81% and that of tier-II capital stood at 5.75%. 
• We are revising our FY2010 earnings estimate upwards by 5.7% to factor in the higher treasury gains and lower provisioning charges on account of the investment depreciation provision write-backs. Meanwhile, we are maintaining our FY2011 estimates. At the current market price of Rs417, the stock trades at 5.6x FY2011E earnings per share (EPS), 2.7x FY2011E pre-provisioning profit (PPP) per share and 1.2x FY2011E adjusted book value (ABV) per share. In view of the limited upside from the current levels to our price target of Rs444, we are downgrading our recommendation on the stock to Hold from Buy earlier.

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