Maintain Buy on Bank of Baroda - Weak core trends, expect improvement in FY13 - BRICS

BOB reported a weak core trend-weak core-fee growth, higher expense ratio (seasonal), a large tax refund, and worsening asset quality (not unexpected). Pre-provision profit came 16% below expectation, although total provisions were in line and asset quality fared better than expected. As disappointing as Q4 earnings are, within our PSU coverage, BOB is still the only bank with comparatively lower slippage ratio, high Tier-1, high RoEs and is trading at 1.0x forward book. Maintain Buy and target at Rs940.

Where was the street disappointed?

We believe the key disappointment was weak core-fee growth (up 2% yoy), higher total provisions (up 43%, but in line with our expectation) and a large tax refund boosting reported profit. Absolute gross NPAs were up 42%, in line with our estimate, while the other negative was that gross restructured advances were up 125% (half of which came from a media company that was also classified as an NPA).

Tweak estimates up. We fine-tune expense ratio and tax related income to bring forth the seasonaility in earnings. We expect provision expenses to be capped in FY13 as we do not see chunky corporate slippages overFY13. We build in loan growth of 22-23% for the next two years. We expect NIM to hover around 3%. Our EPS estimates are Rs126.7 and Rs156.8, up 3% and 0.4% for FY13 and FY14, respectively.

Valuation. Despite a weaker Q4, core trends will improve through the next few quarters. With an adequate provision cover and capital buffer, BOB presents a good opportunity to trade up the quality spectrum – trading at just 1x forward book. Our target price reflects 1.4x forward book and 7.4x forward earnings.

Q4FY12 earnings summary

Seasonal Q4 tax refund improves profitability: On a yoy basis, NII was up 7.0% (6.6% ahead of estimate), but it included seasonal tax refunds; however, this does not impact the yoy comparison. Non-interest income was up 7.6%, but 3.4% below our expectation.

Operating expenses were up 9.4% yoy and 37.4% qoq. Interestingly, the Pension-2 amortisation was lower than the previous three quarters' run rate, which suggests that net pension liabilities declined even in a higher-inflation and rising-DA scenario, and is contrary to our expectation. Expense ratio was significantly higher at 44.5% vs. 31.5% in Q3FY12 and 90bps higher than in Q4FY11. Pre-provision profit was up only 5.4% yoy but down 21% qoq, reflecting on weaker core.

Total provisions were in line with our estimates (1% below) and grew 42.9% yoy. Net profit increased 17.3% yoy, but excluding one-off items, trading gains, and investment amoritsation, adjusted PAT was down 15.1% (26% above estimate). NIM virtually remained the same at 2.96% from 2.99% of Q3FY12.

Balance-sheet growth was robust:

Loans growth was strong-much above both the industry average and our expectation of 25.7% yoy. Deposits also expanded 26.0% yoy, but CASA ratio came down to 33.2% vs. 34.1% in Q3FY12.

Asset quality deteriorated but bettered our estimate:

On an absolute basis, gross NPAs increased 41.6% yoy (inline) and net NPAs by 95%. Gross and net NPA ratio increased to 1.53% and 0.54% from 1.48% and 0.51% in Q3FY12. This bettered our expectation of 1.61% and 0.6%. Provision coverage ratio was flat at 80.05% vs.80.51% in Q3FY12.

Improvement in profitability ratio: RoA improved to 1.41% vs. 1.29% in Q3FY12 while RoE was at 23.09% vs. 21.35% in Q3FY12.

Bank is well capitalised: Tier-1 ratio was at 10.83% and total capital ratio at 14.67% vs. 10.81% and 14.95% in Q3FY12.

Source : Equity Bulls

Keywords