Bank of Baroda: ‘Preferred Pick’

CMP Rs810, Target Rs940, Upside 16.1%

BOB has been the fastest growing large-size PSU bank having grown at 2-6ppt higher than average for the Top 5 in each of the past five years. Defying general perception attached to faster growth, the bank’s asset quality has stood relatively strong. We estimate BOB to deliver 23% credit growth in FY12 with domestic loan growth being in-line with the system. In 9m FY12, the bank managed to earn domestic margin above its guidance of 3.25-3.4% aided by commendable liability cost management. Though NIM could correct slightly in near term, it is likely to sustain at the higher end of guidance in longer term.

Resilient asset quality has differentiated BOB from peers. Bank’s slippages have been much lower indicating superior credit origination and monitoring standards. Further, gross slippage guidance of 1.1-1.3% for FY12 and FY13 imply that outlook also remains stable. Lower delinquencies and a more conservative provisioning (highest PCR at 80%) have contained NPL risk; Net NPL/Networth ratio is substantially lower than peers. Apart from maintaining an astute pricing-risk balance, brisk fee growth and frugal cost management enabled BOB to earn 1%+ RoA on sustainable basis. We don’t see any threat to this trend in the medium term. On capital adequacy front, BOB is better placed with Tier-1 capital near 10% and higher RoEs of 20%+.

BOB has lagged peers in stock performance despite delivering superior results. Stronger fundamentals of the bank warrant a valuation re-rating. Reiterate BOB as Top pick amongst large PSU banks and recommend BUY with 9-month target of Rs940.

Brisk loan growth to continue

BOB has been the fastest growing large-size PSU bank in the past five years recording an average annual loan growth of robust 28%. BOB has grown at 2-6ppt higher rate than the average for the Top 5 PSU banks (SBI, PNB, BOB, BOI and Can Bk) in each of the years. Defying general perception that faster growth entail higher NPL risk, the bank’s asset quality has stood strong in the aforementioned time and more resilient in the recent challenging times. Though the growth has been broad based, larger contributors were international and SME credit segments. While the bank has deliberately moderated growth in retail segment over the past few quarters, the international book growth has accelerated partly aided by rupee depreciation. Having grown advances 14% YTD, we estimate BOB to deliver 23% credit growth in FY12 with domestic growth in-line with the system.