Bank of Baroda - Asset Quality Far From Being Seasoned; Maintain "SELL" - Karvy

Asset Quality - Yet To Be Seasoned: While most of the PSU Banks were struggling with asset quality issues, Bank of Baroda (BoB) had an average slippage of 1.1% in FY11-12. In the aftermath of which there was a change in Management and in line with our expectations the Bank's slippage spiked to 2.2% in FY13. Higher stress has been seen in large and medium corporate segments where Gross NPA has increased by 50 bps to 5.6% in Q2FY14. We believe lot of stress is yet to be captured and seasoning is still undone. Provision coverage is on a constant decline from 80% in FY12 to 62% in H1FY14. The Bank has a restructuring book of 6.5% of loan book.

Business Parameters - Good Show: The Bank has grown its business well above the industry rate. The average growth for last four years has been 25% in deposits as well as advances. However, in the process the Bank's CASA has taken a hit of ~500 bps during the same period. Its overseas business has grown at a higher average rate and now forms 32% of its total business.

NIMs have taken a Hit: The Bank's NIMs have crashed by over 75 bps in last 2 years to 2.3%. The major hit of over 80 bps is seen in domestic segment to 2.8%, whereas international segment has taken a hit of only 20 bps to 1.2%.

Outlook & Valuation

We reiterate our "SELL" recommendation on BoB with unrevised target price of Rs. 615 per share valuing the bank at 0.8x P/ABV FY15E.

Source : Equity Bulls

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