RBI Monetary Policy Preview

RBI Monetary Policy Preview.

Expect a 50bp hike

In the forthcoming Reserve Bank of India (RBI) Monetary Policy Review on May 3, 2011, we expect the central bank to come out of the gradual monetary tightening and hike both repo and reverse repo rates by 50bp each to 7.25% and 6.25%, respectively,
as inflationary pressures have consistently refused to abate. We expect the RBI to keep the statutory liquidity ratio (SLR) and cash reserve ratio (CRR) unchanged at 24.0% and 6.0%, respectively.

Inflation remains sticky with upside risks

Wholesale price index (WPI) inflation has consistently remained well above the RBI's upwardly revised comfort levels. Even for March 2011, for which RBI had raised its projection by a full 250bp from 5.5% projected in November 2010 Monetary Policy Review to 8.0% in its March 2011 Monetary Policy Review, actual WPI inflation came in 100bp higher at 9.0%. In fact, this number could rise closer to 10% once provisional figures are revised (considering the recent trend in revisions).

Growth momentum moderating

Growth momentum of the Indian economy has moderated considerably over the past few months, as evident from IIP growth averaging 5.0% during October 2010–February 2011 compared to 10.4% during 1HFY2011 and GDP growth easing to 8.2% during 3QFY2011 from 8.9% in 1HFY2011.

Even though growth momentum has eased off post the gradual calibrated monetary tightening by the RBI, inflation has remained sticky (above the 8.0% level for the last 15 months). Hence, we believe the RBI is likely to resort to a bolder step and hike repo and reverse repo rates by 50bp each.

Bank of Baroda - RU4QFY2011 - Buy

Result Update on Bank of Baroda for 4QFY2011 with a Buy recommendation and a Target Price of `1,096 (12 months).

 

For 4QFY2011, Bank of Baroda posted healthy net profit growth of 31.0% yoy (21.1% qoq) to `1,294cr. The bank received interest of `252cr on income tax refund and its effective tax rate for the quarter was only 4.5% (compared to 30.9% in 3QFY2011), leading to strong sequential growth in profitability. Asset quality concerns were visible during the quarter, while pension expenses led to higher employee costs. Strong sequential growth in business and non-interest income were the key positives from the results. We recommend a Buy rating on the stock.

Strong sequential business growth, but with higher slippages. For 4QFY2011, the bank's overall net advances grew by healthy 30.6% yoy to `2,28,676cr, while overall deposits also showed strong growth of 26.7% yoy to 3,05,439cr.
Domestic CASA ratio at the end of 4QFY2011 stood at 34.4%, while global CASA ratio stood at 28.7%. Reported NIM of the bank increased by 25bp to healthy 3.45%. Domestic NIM of the bank declined by 12bp to 3.70, while overseas NIM remained stable at 1.41%. During 4QFY2011, the bank witnessed asset-quality concerns with slippages considerably increasing by `390cr sequentially to `667cr. Consequently, annualised slippage ratio increased from 0.6% in 3QFY2011 to 1.5% in 4QFY2011.

Outlook and valuation: At the CMP, the stock is trading at P/ABV multiple of 1.2x FY2013E ABV of `731cr. Historically, the stock has traded at 0.8x–1.3x one-year forward P/ABV multiple, with a five-year median of 1.0x, but has been rerated over the past two years to a 1.5x average. This is because of the bank's consistent improvement in profitability, underpinned by fruitful investments in channel modernisation, healthy CASA and balance sheet growth and declining operating expenses (1.5% of avg. assets in FY2011). We have assigned a target FY2012E P/ABV multiple of 1.5x, implying an upside of 20.2%; hence, we recommend a Buy rating on the stock with a target price of `1,096.