Bank of Baroda - Reasonable show amidst a tough environment - BRICS

BOB came up with a reasonable show amidst a challenging operating environment in Q2FY13, with PPoP (on operating basis) up 6.6% yoy and 3.4% ahead of our expectation. Asset quality suffered, with slippages at 2.5% (vs. our estimate of 2.3%) and lower recoveries, although the optically better gross NPA ratio is reflective of higher write-offs, which resulted in lower effective tax rate. After adjusting for trading income, MTM gains and adjusting for provisions at a constant PCR of 70%, PAT (on operating basis) was down 11.7% yoy, but still came in 3.9% higher than expectation. Notwithstanding its weak earnings profile, BOB still remains one of the better PSU banks in terms of lower earnings volatility, lower slippages and better capitalisation levels. Retain Add with revised target price of Rs760 (up from Rs750 earlier).

Change in estimates: We cut NIM by a further 5-10bps to 2.7% in FY13 and further to 2.6% in FY14 (from 3% in FY12), as we expect BOB's asset yields to decline at a faster pace than its average funding cost. However, this should be offset by a slightly higher balance sheet growth. We raise PPoP by 1.7% for FY13 and lower by 0.3% for FY14. We believe BOB will continue to face asset quality challenges, but expect some benefits to accrue from MTM gains, as the yield curve tapers down. This brings our estimated provisions down vs. our earlier expectation. As a result, our PAT is up 8% for FY13 and 0.5% for FY14 vs. our prior expectations. We estimate a much muted CAGR of 3.8% in EPS and 13% in adjusted book over FY12-14.

Valuation: The stock trades at 1.08x Q2FY14 book (fully adjusted for revaluation reserve, net NPA, unamortized liabilities and 10% slippage from restructured book) and 6.5x 12-month forward earnings. We value the stock at Rs760 (1.06x book and 6.33x earnings).

Source : Equity Bulls

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