Bank of Baroda - Initiating Coverage - BP Wealth

Bank of Baroda (BoB) is one of the largest public sector bank in India, with a loan book of USD 52 bn. BoB is highly concentrated in western India with ~50% of its branches located in Gujarat, Maharashtra and Rajasthan. It is also present in 24 countries with major exposure in U.S.A., U.K and Middle-Eastern countries. Currently ~30% of the bank's business comes from overseas markets. Over FY12-15E, we expect BoB to achieve CAGR of 13% in its business on back of its diversified loan book, efficient retail deposits and prudent operating costs.

Investment Rationale

Strategic presence of branch network to augment growth

BoB has network of 4,192 branches and ~61% are located in semi-urban and rural areas. This will provide future business opportunities to BoB due to unswerving rural consumption. Also, 43% of its branches are located in industrially developed western region which enables an easy access to large corporate & SME clients. Furthermore, BoB plans to open 365 new branches in Q4FY13 in Tier III & IV cities which will act as major catalyst for future business growth. Globally BoB operates in 24 countries through its 58 branches & 97 offices which has translated in strong international business growth. Over the years its share of overseas business in total business has increased from 22.6% in FY09 to 30.4% in 9MFY13. Going forward, bank is likely to focus more on international operations to tap global economic recovery to increase its business. Management targets to reach 30% share in profits from international book.

Business Model - conservative yet consistent growth

We expect the credit growth to increase at ~13% CAGR during FY12-15E led by SME+MSME, mid corporate & Agri loans. This will aid business to grow at a robust 15% CAGR over FY12-15E primarily led by a well diversified loan book and retail deposit based liability franchise. This anticipated asset growth will lead to 13% and 8% CAGR growth in NII and PAT, respectively, over the same period.

Asset quality pressure persist but in better position than its peers

Asset quality of the bank has deteriorated in recent quarters on back of economic slowdown. In Q3FY13, slippages came at elevated levels of Rs 20 bn (2.74% slippage ratio vs. 1.7% run rate). However, slippages witnessed during Q3FY13 were granular in nature. Management expects higher recovery in NPAs in the coming quarters and slippages are likely to be contained at these levels. Despite higher slippages, BoB is better placed among PSU banks in terms of total stress assets with Gross NPA of ~2%. We expect GNPAs to fall to 2% by FY15E from 2.4% in Q3FY13.

Outlook and Valuation - Initiate coverage with target price of Rs 803

The stock has historically traded between 0.8-1.3x its one year forward P/BV, with 8 year median of 1x. With an improvement in business growth, CASA and asset quality coupled with higher return ratios, we expect the stock to command higher multiple going forward. At the CMP, stock trades at 0.8x & 0.7x FY14E & FY15E adjusted book value (ABV) respectively. We expect return ratios to improve from current levels i.e. RoE to reach to 17.5% in FY15E from 15.3% in Q3FY13. We value the bank at a conservative 0.85x FY15E ABV and arrive at a target price of Rs 803 with an upside potential of 21% from the CMP, for the investment horizon of 12-18 months. We initiate our coverage on the bank with "BUY" rating.

Source : Equity Bulls

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