Bank of Baroda – Downgraded to REDUCE, TP Rs.650 - Geojit BNP Paribas

- Although Bank of Baroda (BoB) has been the best PSU bank on all counts for the last four or five years, it will find it challenging to maintain this performance under the current macro environment.

- Asset quality is expected to deteriorate with signs of weakness in the last few quarters, and will become more pronounced on a low base. Hence, earnings forecasts have been cut by 4% for FY13E and ROEs are expected to stagnate around 14-16% over FY14-15E due to rising credit costs.

- With the retirement of current CMD Dr. Mallya and his top management team in CY12-13, the bank may find it hard to maintain its superlative performance.

- NII at Rs.2860 crores was in line with estimates, while PAT at Rs.1300 crores was 14% above estimates. Annualized slippage in loans continues to be at 2.2%. The calculated provision coverage ratio has steadily declined to 60% from 65%, QoQ.

- BoB's credit cost has been one of the lowest among peers and a further increase in credit costs remains a risk and is the main reason for our rating downgrade.

- At the reduced target price, BoB would trade at fair valuations given the uncertainty on NPLs, restructured asset creation and management changes. Hence, to take advantage of a turnaround in the economy we would look to other PSU and Private Banks where there is upside potential to the decline in already-high credit costs.

- Hence, it is recommended to book profits in BoB and waiting for a couple of quarters under new management before reviewing this stock. We cut the TP to Rs.650 (from Rs.799) and rating to REDUCE (from Buy).

- Upside risks: lower slippages, turnaround in macro and sustained reforms.

Source : Equity Bulls

Keywords