Bank of Baroda - Q4FY12 Result update - Centrum

Asset quality disappoints

BoB's Q4FY12 bottom-line (Rs15.2bn, 17% YoY) came in above our high-thanconsensus estimates driven by significant tax write-back (partly offset by higher provisions towards credit and retirement benefits). Asset quality deteriorated with slippage rate accelerating to 2%, GNPA jumping by 15% QoQ and restructuring rising by 53% QoQ to 5.3% of loans book (led by SEB & aviation). Current valuations (0.8x FY14 ABV) largely factors in potential risks arising from the scheduled change in the management team. We maintain Buy on attractive valuations.

- Asset quality slips: BoB's asset quality matrices deteriorated during Q4FY12 with 1) GNPA jumping 15% QoQ despite strong recoveries and aggressive writeoffs as slippage rate accelerated further to 2% on account of some lumpy accounts 2) restructuring up by 53% QoQ to 5.3% of loans book led by aviation and SEBs. The management guided for better asset quality performance in quarters to come as most of the troubled assets have either slipped into NPA or have been restructured. While the asset quality matrices still remain better than peers, the poor show during Q4FY12 does remove some of shine off BoB.

- Multiple one offs: Q4FY12 earnings include multiple one offs including benefit of Rs5.3bn in form of tax refunds (Rs4.3bn as reversal of provision and Rs1bn as part of interest income). This was partly offset by adhoc provisions of Rs3.3bn and extra provisioning towards retirement benefits due to change in actuarial valuation (Rs3bn in Q4FY12 vs run rate of Rs1.3bn). Excluding these one offs, the FY12 bottom-line would stand at ~Rs5.7bn vs Rs5bn reported.

- Topline in line: BoB's Q4FY12 performance on NII and non-interest income front was in line with expectations with Net total income growth of 7% YoY. The in-line performance was result of stable NIMs sequentially coupled with a healthy 26% credit growth. Meanwhile, the non-interest income growth (7.6% YoY) was dragged by weak fee income stream though recoveries during the quarter were healthy.

- Strong credit growth led by SME segment: The advances book grew by a strong 26% YoY primarily driven by the SME segment (26% YoY). The continued focus on SME segment for driving the loan book growth seems to be driven by desire to maintain strong yields and hence NIM. The loan book growth benefitted from currency depreciation which propped the overseas loan book growth to 44% YoY.

- Maintain Buy on valuations: We have revisited our earnings estimates to factor in additional information. While we are rolling over our valuation to FY14E, we lower our fair value estimate to Rs850 implying a lower fair vale multiple (result of deterioration in asset quality matrices). At current market price of Rs687, the stock trades at 4.2x FY2014E EPS and 0.8x FY2014E ABVPS. Current valuations are factoring in extreme negative expectations, likely due to scheduled change in the management team (CMD and ED retiring in mid-FY13). However, current valuations factor in most of the potential risks and hence we maintain our Buy recommendation on attractive valuations.

Source : Equity Bulls

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