Bank of Baroda (Q4 FY11)

CMP Rs939, Target price Rs1,050, Upside 11.9% 

• Bank of Baroda (BOB) Q4 FY11 net profit at Rs12.9bn came in higher than our estimates of Rs11.7bn. Higher operating cost and provision charges was more than off-set by healthy growth in NII and non interest income. Domestic margins expanded 34bps qoq to multi-quarter high of 4.2%. Global loan book grew 10.4% qoq (30.6% yoy) with deposit growth at 8.5% qoq (26.7% yoy). LDR inched to 75% levels. 
   
• The domestic loan book expanded 11.4% qoq (28.7% yoy). Growth was witnessed across segments of retail (up 34% yoy), SME (up 30% yoy) and agri (up 14% yoy). With 75-100bps hike in lending rates implemented during the quarter, domestic margins expanded 34bps qoq to multi quarter high of 4.2%. Domestic deposits during the quarter grew 8% qoq (26% yoy). Domestic CASA growth however came in lower at 6% qoq (21.4% yoy) with share of CASA proportion declining to 34.4%.
  
• International business continues to grow at 30%+ rate and comprises ~25% of total business. During the quarter, international loan book grew 7.4% qoq (37% yoy). Deposit growth too remained healthy at 29% yoy (9% qoq). Margins on the international front however remained flat at 1.4%. With presence across 25 countries through 85 offices, operating cost has remained low with C/Income ratio at <20% vs. 43% on domestic front. Asset quality too remains comfortable with GNPA at 0.62%
  
• BoB had maintained an adequate check on its asset quality in the past. However, during the quarter, GNPA at 1.4% grew 31% yoy (14% qoq) owing to higher slippages. Slippages during the quarter came in higher at Rs6bn (1.5% on annualized basis). Agri and SME continue to remain areas of concern for the bank. The bank restructured loans to the tune of Rs6.7bn during the quarter taking the total restructured loan portfolio to Rs67.1bn or 2.9% of total loans. PCR (including technical-w/off.) remained healthy at 85% levels.
  
• We have lowered our FY12 and FY13 net profit estimates factoring in margin compression, higher provisions and lower growth. We expect BoB to witness 26% CAGR in loan book over FY10-13E. This would translate into 24%/27% CAGR in balance sheet/ net profit over FY10-13E. During the quarter, the bank received Rs24.6bn from GoI towards the recapitalization scheme, thereby boosting its capital adequacy ratio. Steady growth, adequate capital with decent return ratios and improving market share should drive valuations for the bank. We value the bank at 1.4x FY13E book to arrive at target price of Rs1,050. Upgrade to BUY.