Bank of Baroda - Reliance Securities

Net profit intact despite deteriorating asset quality

Key highlights of the result

- Net Profit growth high, backed by impressive fee income: In 3QFY2012, Bank of Baroda's (BOB) Net Interest Income (NII) grew 15.8% yoy and 3.5% qoq to Rs2,656cr. Interest income increased 35.4% yoy and 5.8% qoq to Rs7,672cr on the back of high growth in advances of 25.8% yoy and 9.0% qoq. Interest expense increased 48.7% yoy and 7.1% qoq to Rs5,016cr in 3QFY2012. Non-Interest income grew impressively by 70% yoy and 56.5% qoq to Rs1,149cr. Provisions and Contingencies (excluding tax provisions) for the bank grew 175.2% yoy and 73.1% qoq to Rs837cr on account of higher provisions for bad loans and depreciation on investments. Net Profit reported an increase of 20.7% yoy and 10.6% qoq to Rs1,290cr.

- Steady balance sheet: Total net advances (including overseas) book grew 25.8% yoy and 9% qoq to Rs2.6 lakh crore as on December 31, 2012. Major growth was seen from its overseas loan book which contributed ~31% of the total advances. Total deposits (including overseas) grew 24% yoy and 6.1% qoq to Rs3.5 lakh crore. Growth was primarily witnessed in the bank's overseas deposits which contributed ~27% of the total deposits. Savings deposits contributed ~21% of the total deposits.

- Asset quality deteriorates: GNPAs of the bank stood at Rs3,895cr (1.5%) and %Net NPAs were reported at 0.5% as on 3QFY2012. The bank witnessed an increase in slippages primarily in Agriculture and MSME portfolio. Provision coverage ratio (excl. technical write offs) stood at 66%. Restructured loans increased from telecom & infra sectors to ~4% of the loan book and ~13% loans slipped into NPA out of the restructured book.

- Other highlights of the quarter: The bank's capital adequacy ratio was at 13.5% (including Tier 1 at 9.3%) as on 3QFY2012, despite a growth of 25.8% yoy in the bank's loan book. The bank currently has over 3,690 branches and 1,840 ATMs.

Outlook and Valuation

A robust growth in other income and tight control on operating expenses helped Bank of Baroda report a ~21% increase in Net Profit at Rs1,290cr in 3QFY2012. The asset quality, however, deteriorated on the back of challenging domestic environment. We remain cautious on any signs of further slippages and have factored the same in our estimates. We like the bank for its wide distribution network, firm asset quality, above average loan growth, good return ratios and modest margins as compared to its peers. Bank of Baroda has been consistently growing its assets above the industry growth rate since the last many years. We expect the bank to outperform the industry going forward, since it has major portion of its operations in the growing states of Gujarat and Maharashtra. At the CMP of Rs789, the bank is trading at 1.1x FY2013E ABV. We keep our estimates broadly unchanged and maintain our Buy recommendation on Bank of Baroda with a target price of Rs923, implying an upside of ~17% from the CMP.

Risks to the view

- Any global uncertainty and unprecedented domestic slowdown holds downside risk to our overall balance sheet growth and credit quality estimates
- Lower than anticipated CASA and sharp increase in savings account rate due to competitive pressures holds a downside risk to our margin estimates.

Source : Equity Bulls

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