Buy Bank of Baroda; target of Rs 999: Aditya Birla Money

“Bank of Baroda (BOB), net Profit after tax for the current quarter increased 14.4% YoY (12.9% QoQ) to Rs 11660.8 mn from Rs 10193.0 mn for Q2 FY11. The growth in PAT on YoY basis was mainly driven by 25.9% YoY (11.7% QoQ) increase in the NII at Rs 25669.1 mn (led by robust growth in advances coupled with sharp improvement in margins). Added to this, better operational efficiency during the quarter further aided the growth in net profit. Cost to income ratio during the quarter improved by 390 bps YoY and 249 bps QoQ to 35.2% driven by flat to negative growth in staff expenses. However, lower other income growth at 7.8% YoY (led by lower trading gains) and higher provisions (167.6% YoY, 22.8% QoQ) moderated the growth in profit to some extent. Net Interest Margins (reported) improved sequentially by 20 bps (5 bps YoY) from 2.87% to 3.07% driven by sharp increase in domestic NIMs. The domestic NIMs improved from 3.39% in the last quarter to 3.67% driven by 91 bps increase in Yield on Advances as against a 43 bps increase in cost of deposits. Added to this higher yield on investments in the domestic book (13 bps increase) further aided the improvement in margins.”

“Total business of the bank registered a robust growth of ~22.8% YoY (4.2% QoQ) as at Q2 FY12. Deposits grew by 22.1% YoY (5.2% QoQ) from Rs 2696.6 bn in Q2FY11 to Rs 3291.9 bn in the current quarter, whereas Net Advances grew by 23.9% YoY (2.9% QoQ) from `1929.6 bn to Rs 2391.2 bn over the same period. Share of domestic CASA deposits stood at 34.02% a decline of 48 bps QoQ mainly on the back of higher term deposits leading to shifting of deposits. Going forward, we expect deposit and advances to grow at a CAGR of 22.4% and 21.3% respectively over FY11-13E. Asset quality remained firm on sequential basis but slipped on YoY basis. Gross NPA has increased 25.1% YoY and declined 0.7% QoQ to Rs 34.02 bn in the quarter under review. In percentage term GNPA increased by 2 bps YoY against a decline of 5 bps on QoQ basis. Sharp recovery in the current quarter to the tune of Rs 6.06 bn against a fresh addition of Rs 5.83 bn has led to the sequential improvement in asset quality. Net NPA has jumped up 53.0% YoY and 9.2% QoQ to Rs 11.19 bn. The restructured book stood at Rs 78.29 bn of which Rs 11.18 bn were restructured during the quarter. The bank had opened 29 new branches in this quarter taking the total number of branches to 3492. The Bank plans to open 264 branches in Tier-1 & Tier-2 centres and 305 branches in Tier-3 to Tier-6 centres in the current fiscal.”

“The improvement in asset quality led by lower slippages and sharp recovery was a positive surprise during the quarter. The bank’s strong asset quality, superior return ratios, strong asset growth, better productivity and adequate capitalization bodes well for its future growth. We estimate BoB to report an EPS CAGR of 18.0% over FY11-FY13E. ABV is estimated to grow at 18.9% CAGR during the same period. We have slightly increased our target price to Rs 999.7 with a BUY rating (Rs 989.1 earlier) thus providing an upside potential of 24.9% from current levels,” says Aditya Birla Money research report.

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