>Bank of Baroda (ULJK Securities)

Bank of Baroda has posted a positive improvement in its return ratios driven by robust growth in the top line particularly non interest income. Asset quality of the bank also improved and the Gross NPA level now stands at 1.5%. Improvement in ROA will lead to an improvement in ROE, which we believe result in re rating for the stock. Looking at its sustainable growth prospect and attractive valuation, We recommend “BUY” on the stock with a target price of Rs.284 for a medium to long term horizon.

INVESTMENT RATIONALE

■ Continued focus on the asset growth. We expect the bank’s advances to grow at a CAGR of approx 22% during FY08A‐FY10E against management guidance of 25% growth. Priority sector status to the housing loan may result in a decent growth in the mortgage loan portfolio of the bank. In the FY10E, we expect much of the growth coming from the SME segment. The growth in the advances will lead to a decent growth in the NII of the bank resulting in stable net profit growth.

■ Non interest income continues to improve: We expect non interest income of the bank to grow at a CAGR of 18% during the period FY08A‐FY10E. We believe the growth would be coming from the fee income mostly trade related finance and business activities. Return Ratios continues to improve: The strong growth in the non interest income will result in improvement of return ratios of the bank. We expect the ROA of the bank to show an improvement of 9bps during the period resulting in ROE of 17% during the period FY08A‐FY10E.

■ Valuation: At CMP of Rs.220, BOB is presently trading at P/ABV 0.7x of our FY09E ABV of Rs.279 and at P/E 4x of our FY09E EPS of Rs.53.9. We recommend a “BUY” on the stock with a fair value target price of Rs.284 Discounting the FY09E ABV by 1x and FY10E ABV by 0.95x.

To see full report: BANK OF BARODA