HOLD Bank of Baroda - Management change can be tricky - Karvy

Bank of Baroda (BoB) is currently trading at its five year average valuation. However, the stock has underperformed the Bankex by 23% over last one year reflecting incremental stress in last two quarters along with expectation of further deterioration in asset portfolio in the aftermath of change in management and partial correction of valuation premium over its peers.

Asset Quality Matrix - Better Placed: Bank of Baroda is better placed amongst the large PSU banks in terms of total stress assets with Gross NPA of 2% and restructured assets of 7.2%, though some amount of incremental deterioration in asset quality is seen in H1FY13. The Bank enjoys comfortable provision coverage of 76%.

Business Parameters - Good Show: The Bank has grown its business well above the industry rate. The average growth for last four years has been 26% in deposits and 28% in advances. But in the process, the Bank's CASA has taken a hit of ~500 bps during the same period. Its overseas business has grown at an even higher average rate of 39% over last four years and now forms 30% of its total business.

Change in Management - A Key Risk: With the change in management, concern over deterioration in asset quality has risen. Higher growth in credit along with resilience in asset quality has been strength, but it can turn into a risk if slippages start increasing.

Outlook & Valuation

At the CMP, the stock trades at 5.6x & 4.6x FY14E & FY15E earnings, and at 1.1x & 0.9x P/ABV FY14E & FY15E, respectively. Based on its historical mean valuation implying 1x P/ABV FY15E, we reiterate our "HOLD" recommendation on Bank of Baroda with upwardly revised target price of Rs. 985 per share (from Rs. 740 earlier).

Source : Equity Bulls

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