Stock Market Result Update on Bank of Baroda for 2QFY2012

Stock Market Result Update on Bank of Baroda for 2QFY2012 with an Accumulate recommendation and a Target Price of `881 (12 months).

For 2QFY2012, Bank of Baroda reported reasonable 14.4% yoy growth in its net profit to `1,166cr, above our estimate of `1,088cr, primarily due to considerably better operating income than built in by us, which was largely offset by higher provisioning expenses. Sequential expansion in NIM coupled with persistence of healthy asset-quality trends were the key positive takeaways from the results. we recommend an Accumulate on the stock.

Sequential expansion in NIM coupled with persistence of healthy asset-quality: For 2QFY2012, the bank’s overall business momentum remained moderate, with advances growing by 2.9% qoq (up 23.9% yoy) and deposits increasing by 5.2% qoq (22.1% yoy). Global saving account deposits growth was relatively better at 15.5% yoy. However, slower (5.7% yoy) growth in current account deposits led to a 220bp yoy compression in calculated global CASA ratio to 27.4%. The sharp 91bp qoq expansion in yield on advances vis-à-vis a 43bp qoq rise in cost of deposits led to a 28bp qoq expansion in reported domestic NIM to 3.7%. Fee-based income rose reasonably by 13.2% yoy. Recoveries from written-off accounts witnessed a robust 76.4% yoy rise to `122cr during 2QFY2012. On the asset-quality front, the bank continued to surprise positively with annualized slippage ratio in check at 1.0%. Absolute amount of gross NPAs declined on a qoq basis, albeit marginally. Gross and net NPA ratios remained largely flat on a sequential basis at 1.4% and 0.5%, respectively. Provisioning expenses were considerably higher than expected as the bank chose to maintain its provision coverage ratio (including technical write-offs) at elevated levels of 82.0%.

Outlook and valuation: The stock is trading at 1.1x FY2013E ABV. Historically, the stock has traded at 0.8x–1.3x one-year forward P/ABV multiple, with a five-year median of 1.0x, but it has been rerated over the past two years to a 1.3x average on the back of the bank’s consistent improvement in profitability, underpinned by fruitful investments in channel modernisation, healthy CASA and balance sheet growth and declining operating expenses (1.5% of avg. assets in FY2011). Post the recent run-up in the stock after the announcement of the results, we recommend an Accumulate stance on the stock with a target price of `881.