Bank of Baroda (Q1 FY13)

CMP Rs673, Target Rs800, Upside 18.5%

• Weaker than expected loan growth led by decline in domestic credit
• NIM correction in-line with expectation; bank confident of sustaining NIM 
• Fee growth muted; C/I ratio improve substantially on opex decline 
• Larger than expected deterioration in asset quality was the key disappointment; RoA decline to multi-quarter low
• Downgrade BV estimates but retain BUY with 9-month target to Rs800

Weaker than expected loan growth led by decline in domestic credit

BOB’s advances were flat (-0.5%) sequentially while representing a robust 23% growth yoy. Domestic advances contracted by 3% qoq driven by a sharp decline in retail (-8% qoq) and agri (-4% qoq) segments. With the bank being cautious in expanding domestic balance sheet due to challenging credit conditions, it targets to grow marginally ahead of the system in the current year. International advances increased by 5% qoq most likely reflecting the sharp rupee depreciation

Deposits mirrored loan growth; ~100bps decline in domestic CASA on sequential basis

Deposits were also flat on sequential basis. However, on yoy basis 18% growth in domestic deposits indicated relatively strong mobilization by the BOB. Domestic CASA declined by 100bps for second consecutive quarter to 32% on account of 21% qoq decline in current accounts balance. Savings deposits growth of 15% yoy was healthy in the light of intensified competition and widened rate differential of retail TDs. In our view, CASA ratio would improve in the longer term aided by easing of liquidity conditions, softening of retail TD rates and improved maturity of branched added in rural/semi-urban in the past two years. Having added 800+ branches over FY11-12, BOB plans to add 570 branches in FY13. 

NIM correction in line with expectations; bank confident of sustaining NIM 

Domestic NIM of BOB declined by 22bps qoq to 3.2% (7-8bps decline on account of ~Rs1bn interest on IT refund in Q4 FY12). Margin contraction was driven by both increase in CoD and marginal decline in YoA. International NIM, after having witnessed strong expansion over the past two quarters, contracted by 13bps qoq to 1.6% due to material fall in loan yield. The bank is confident about maintaining its global NIM near 2.7-2.8%. 

Fee growth muted; C/I ratio improve substantially on significant opex decline 

Fee income growth slowed down materially during the quarter with yoy increase at 4%. We reckon that it could be lower than balance sheet growth in FY13. Higher currency volatility continues to drive robust growth in forex income (17% qoq/37% yoy). Trading profit at Rs815mn was significantly lower than previous quarter. There was a material decline in both employee cost (-25% qoq) and other opex (-11% qoq). In the previous quarter, BOB had to make higher pension provisioning on account of revision in actuarial assumptions. C/I ratio improved substantially from 45% to 37%.  

Larger than expected deterioration in asset quality was the key disappointment; RoA decline to multi-quarter low

BOB’s asset quality deteriorated materially for third consecutive quarter. Gross NPLs increased by 19% qoq on the back of elevated additions; slippage ratio stood at annualized 1.8% (1.9% in Q4 FY12 and 1.5% in Q3 FY12). Slippages were dominated by smaller accounts (Agri/Rural) with absence of any chunky corporate accounts. In response to substantial slippages during the quarter, BOB sustained with high credit cost at 1.1% (1.4% in Q4 FY12), enabling it to maintain PCR near 80% in line with the stated objective. Restructuring during the quarter was minimal at Rs7.7bn (~Rs54bn in Q4 FY12) as was guided by the bank. Impacted by NIM contraction and higher provisioning, BOB’s RoA deteriorated to a multi-quarter low of 1%. 

Downgrade BV estimates but retain BUY with 9-month target of Rs800

A sharp deterioration in asset quality for three succeeding quarters has dented bank’s perception as being one of the most resilient public banks. We have lowered earnings projections for FY13/14 by 6-9% factoring sustained operational weakness. However, we retain BUY on Bank of Baroda with reduced price target of Rs800 as inexpensive valuation offers absolute upside.