Accumulate Bank of Baroda; target Rs 808: AB Money

Aditya Birla Money is bullish on Bank of Baroda (BoB) and has recommended accumulate rating on the stock with a target price of Rs 808 in its November 2, 2012 research report.

"Bank of Baroda, net Profit after tax for the current quarter increased 11.6% YoY (14.3% QoQ) to Rs 13013.9 mn from Rs 11660.8 mn for Q2 FY12. The muted growth in PAT on YoY basis was on the back of subdued growth in NII at 11.5%. Decline in margins (36 bps YoY) coupled with lower CD ratio (decline of 105 bps YoY) impacted the NII growth during the quarter. However, sequentially the growth in PAT was mainly on the back of lower provisions. Provisions declined (27.3% QoQ) despite higher slippage (~2.1% annualised vs ~1.8% in Q1) mainly on the back of write back of investment provision. Other income during the quarter grew by 12.8% YoY (7.5% QoQ) on the back of strong trading gains while growth in core fee income remained muted at 2.8% YoY.

Global Net Interest Margins (reported) declined both on a YoY basis and sequentially by 36 bps and 2 bps respectively to 2.71% driven by sharp decline in domestic NIMs by 44 bps on a YoY basis (increase of 1 bps sequentially). Domestic cost of deposits jumped 52 bps YoY (6 bps QoQ) to 7.36, whereas Domestic yield on advances declined 39 bps YoY (improved 10 bps QoQ) to 11.75% during Q2FY13. On the flip side higher yield on investments both in the domestic and overseas book has provided some support to the margins. Going forward, we expect the NIMs (calculated) to decline by ~19 bps to 2.58% in the current fiscal.

Total business of the bank registered a robust growth of ~23.2% YoY (4.8% QoQ) as at Q2FY13. Deposits grew by 24.0% YoY (6.6% QoQ), whereas Net Advances grew by 22.2% YoY (2.2% QoQ). The growth in loan book was driven by strong 33.3% YoY growth in its international book (around 25% YoY excluding currency depreciation effect). Going forward, the management expects the loan book to grow at 1-1.5% above industry growth. Share of domestic CASA deposits registered a decline of ~48 bps QoQ from 32.2% to 31.7%.

Asset quality deteriorated during the quarter with GNPA increasing by 73% YoY (11% QoQ). In percentage term GNPA increased by 57 bps YoY (14 bps QoQ). The gross slippages during the quarter stood at Rs 14.7 bn (~2.1% annualised). Management indicated that two of large corporate accounts (~Rs 4 bn in total) have slipped into NPA during the quarter. Provision coverage during the quarter dipped by 768 bps YoY (589 bps QoQ) to 59.4%. The Bank has restructured Rs 9.33 bn of advances during the quarter. Outstanding restructured assets at the end of the quarter stood at Rs 166.8 bn of which Rs 15.0 bn (~9% of the total restructured book) slipped into NPA's till date. Going forward, the bank proposes to maintain the GNPA and NNPA below 2% and 1%, respectively. The bank had opened 108 new branches in this quarter taking the total number of branches to 4021. The Bank plans to open 475 new branches in FY13.

The bank continues to witness sharp deterioration in its asset quality during the quarter. BoB will have to make an incremental provisioning of ~ Rs 1.25 bn on account of increase in provisioning requirement on the restructured standard restructured book by RBI from 2.0% to 2.75%. Added to this, considering the possibility of higher incremental restructuring and risk of higher slippages in the restructured portfolio we have increased our provisioning assumptions for FY13E & FY14E by ~8-9%. We estimate BoB to report an EPS CAGR of 13.6% over FY12- FY14E. ABV is estimated to grow at 15.4% CAGR during the same period. We roll our target price to September 13 revising our target price to Rs 808.0 (Rs 780.2 earlier) valuing the bank at 0.9x its FY14E ABV, implying an upside of 9.7% from current levels. Thus we retain our Accumulate rating," says Aditya Birla Money research report.

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