Sunday, May 1, 2011

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.

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