Bank of Baroda (Q4 FY12)

CMP Rs687, Target Rs850, Upside 23.7%

• Stronger than expected loan growth; domestic credit growth at 19% for FY12
• Domestic NIM declined marginally; likely to further correct and stabilize thereafter 
• Fee growth decelerate; C/I ratio deteriorate substantially
• Material deterioration in asset quality was the key disappointment
• Downgrade BV estimates; retain BUY with 9-month target of Rs850

Result table

(Rs m)	Q4 FY12	Q3 FY12	% qoq	Q4 FY11	% yoy
Total Interest Income	81,185	76,720	5.8	63,342	28.2
Interest expended	(53,211)	(50,165)	6.1	(37,203)	43.0
Net Interest Income	27,974	26,555	5.3	26,139	7.0
Other income	8,978	11,493	(21.9)	8,345	7.6
Total Income	36,952	38,048	(2.9)	34,484	7.2
Operating expenses	(16,443)	(11,967)	37.4	(15,026)	9.4
Provisions	(8,437)	(8,367)	0.8	(5,904)	42.9
PBT	12,073	17,715	(31.8)	13,554	(10.9)
Tax	3,217	(4,686)	(168.6)	(611)	(626.9)
Adjusted PAT	15,289	13,029	17.4	12,944	18.1
Exceptional items	(107)	-	-	-	-
Reported PAT	15,182	13,029	16.5	12,944	17.3
EPS	37.1	33.2	11.8	33.0	12.5

(Rs bn)	Q4 FY12	Q3 FY12	% qoq	Q4 FY11	% yoy
Loans	2,874	2,607	10.2	2,287	25.7
Deposits	3,849	3,492	10.2	3,054	26.0
- Domestic CASA	929	868	7.0	802	15.9

Key Ratios	Q4 FY12	Q3 FY12	chg qoq	Q4 FY11	chg yoy
NIM (%)	3.0	3.0	(0.03)	3.5	(0.49)
Global YoA	9.3	9.5	(0.1)	8.7	0.6
Global YoI	7.5	7.7	(0.1)	6.8	0.7
Global CoD	5.8	5.7	0.2	4.8	1.0
CASA (%)	33.2	34.1	(0.9)	34.4	(1.2)
C/D (%)	74.7	74.6	0.0	74.9	(0.2)
Non-interest income (%)	24.3	30.2	(5.9)	24.2	0.1
Cost to Income (%)	44.5	31.5	13.0	43.6	0.9
RoA (%)	1.4	1.3	0.1	1.5	(0.1)
CAR (%)	14.7	13.5	1.2	14.5	0.2
Gross NPA (%)	1.5	1.5	0.1	1.4	0.2
Net NPA (%)	0.5	0.5	0.0	0.4	0.2

Source: Company, India Infoline Research

Stronger than expected loan growth; domestic credit growth at 19% for FY12   
BOB’s advances grew significantly ahead of expectations at 10% qoq and 26% yoy in Q4 FY12. Annual domestic credit expansion was at 19% (higher than system) mainly driven by robust growth in the corporate (25% yoy) and SME (26% yoy) book. Sequential credit expansion of 12% was driven by retail (15% qoq), agri (11% qoq) and corporate (17% qoq) segments. International advances grew by 44% during the year partly aided by the sharp rupee depreciation. BOB has guided to grow domestic loan book 1-3% higher than system in FY13.
Deposits growth was equally strong; ~100bps CASA decline on sequential basis
In line with advances, deposits also grew by 10% qoq and 26% yoy in Q4 FY12. During the year FY12, domestic deposits increased by 20%, far higher than system, driven by robust mobilization of retail term deposits on account of higher rates. CASA deposits growth was at 16% yoy within which savings deposits grew by 15% yoy which is commendable considering attractive retail TD rate differential and higher savings rate (6-7%) offered by some smaller private banks. On sequential basis, domestic CASA ratio declined by ~100bps to 33%. In our view, this ratio would improve over the longer term aided by softening of retail TD rates and aggressive branch addition in rural and semi-urban areas by the bank. BOB has added 800+ branches in the past two years and plans to add 570 branches in FY13. 

Domestic NIM declined marginally; likely to further correct and stabilize thereafter 
The domestic NIM of BOB declined by 7bps qoq to 3.4% (contraction was higher excluding interest of ~Rs1bn on IT refund) touching the guided band of 3.25-3.4%. Domestic YoA contracted materially by 30bps qoq likely driven by shift in loan mix towards agri and corporate segments. On the other side, CoD increased by significant 30bps qoq on account of re-pricing of retail TDs and higher cost of bulk deposits. International NIM continued to expand (4bps qoq to 1.7%) aided by improvement in YoA and decline in CoD. We expect domestic margin to further decline and stabilize near the higher end of the bank’s guided band in the longer term. 

Fee growth decelerate; C/I ratio deteriorate substantially on significant opex increase 
Fee income growth slowed down materially during the quarter with sequential increase at 9% qoq (lower than traditional trend) and yoy growth at just 2%. For the full-year, fee growth was at modest 14% being significantly lower than balance sheet growth. Higher currency volatility during the year partly aided strong 34% growth in forex income. Both, trading profits (37% yoy) and recovery of prudentially written-off accounts (20% yoy) were higher than FY11. During Q4 FY12, there was a sharp spike in employee expenses (51% qoq) on account of higher pension provisioning (non-recurring in nature) with revision in actuarial assumptions. Resultantly, the C/I ratio deteriorated significantly to 45% from 32% in the previous quarter. 
 
Larger than expected deterioration in asset quality was the key disappointment
After being stable in the past, BOB’s asset quality deteriorated materially for second consecutive quarter. Gross NPLs increased by 15% qoq on the back of significantly higher additions; slippage ratio stood at annualized 2.1% (as compared to 1.6% in Q3 FY12 and 1.1% in H1 FY12). Quarterly addition to Gross NPL was at Rs13bn mainly contributed by the corporate segment comprising few lumpy accounts. Slippages in other segments continue to run below expectations. Delinquency ratio for FY12 stood at 1.3%, higher than bank’s guidance of 1-1.2%. In response to substantial slippages during the quarter, BOB raised credit cost to 1.4% (0.8% in Q3 FY12) thereby sustaining PCR at 80% in-line with its stated objective. Restructuring during the quarter was huge at ~Rs54bn, mainly comprising few large accounts in aviation and power sectors. NPV sacrifice on Air India restructuring would be amortized over eight quarters starting from Q1 FY13. As per the bank, aviation and SEB restructuring is over and lumpy slippages are behind. Therefore, asset quality stress is likely to be significantly lower in coming quarters (normal slippages expected in the range of 1-1.2% in FY13).   

Capital adequacy strong; sustainable operational RoA near 1.1%
BOB’s CAR and Tier-1 ratio stood strong at 15% and 11% respectively at the end of FY12. The bank is adequately capitalized for brisk 20% balance sheet growth over the next three years. During Q4 FY12, bank raised equity capital of Rs16.5bn by allotting 19.6mn shares to LIC on preferential basis thereby boosting its core capital. The annualized RoA for the quarter stood at 1.4% influenced by multiple one-off items. We expect the bank to sustain operational RoA near 1.1% over the next two years.

Downgrade BV estimates but retain BUY with 9-month target to Rs850
Material deterioration in asset quality for two succeeding quarters has dented bank’s perception as being the most resilient public bank. Further, operational performance was weak driven by margin contraction, moderating fee growth and higher opex. We have adjusted our earnings projections for FY13/14 lower to factor marginal operational and asset quality stress and resultantly BV estimates have declined by 3-4%. Sharp price correction has largely factored the fundamental adjustment, according to us. Retain BUY on Bank of Baroda with reduced price target of Rs850. 

Financial summary

Y/e 31 Mar (Rs m)	FY11	FY12E	FY13E	FY14E
Total operating income	116,115	137,393	159,854	192,576
yoy growth (%)	32.8	18.3	16.3	20.5
Operating profit (pre-provisions)	69,816	86,304	100,590	123,237
Net profit	42,417	50,567	52,679	64,175
yoy growth (%)	38.7	19.2	4.2	21.8
EPS (Rs)	108.0	122.6	127.7	155.6
Adj.BVPS (Rs)	461.4	583.5	684.7	803.2
P/E (x)	6.4	5.6	5.4	4.4
P/BV (x)	1.5	1.2	1.0	0.9
ROE (%)	24.9	21.7	19.0	19.7
ROA (%)	1.3	1.3	1.1	1.1
Dividend yield (%)	2.4	2.6	2.8	3.5
CAR (%)	14.5	14.7	13.9	12.9

Source: Company, India Infoline Research