>BANK OF BARODA (ICICI DIRECT)

A pure banking play...

Bank of Baroda (BoB) is the third largest public sector bank (PSB), differentiating itself on account of higher share of international business, conservative approach and qualitative growth. We expect its profits to grow at 18% CAGR over FY09-FY11E to Rs 3117 crore while market share is likely to consolidate at current levels.

■ Business growth: Conservative yet consistent
The balance sheet of BoB grew at 26% CAGR to Rs 227406 crore. This resulted in an improvement in its market share from 3.5% to the 4% level in the last three years in spite of stiff competition from private banks. BoB has cautiously not reduced BPLR below 12%. Most loans
are now priced near PLR, reducing sub-PLR loans gradually, whereby margins are maintained at 2.6-2.7%. We anticipate balance sheet growth of 17% CAGR over FY09-FY11E to Rs 310995 crore. The bank’s stressed assets (GNPA and restructured) are lowest among comparable PSBs at approximately 4.2% of advances. This gives some comfort on asset quality concerns.

■ Productivity improving due to CBS implementation and employee mix
In spite of high growth, employee strength has reduced from 39529 to 36838. This hasimproved productivity whereby business per employee is up 28% CAGR to Rs 7.6 crore in FY09 from Rs 4.6 crore in FY07. Also, profit per branch has improved from Rs.40 lakh to Rs 80 lakh in three years.

■ Valuation…
We value the core business of the bank at 1.1x FY11E ABV, a discount of 20% to it P/ABV multiple of 1.4x as per single stage Gordon growth model due to uncertain market conditions. We have considered cost of equity at 13.9%, perpetual growth of 3% and sustainable RoE of 18%. This translates into fair value of Rs 514 per share for the bank. With RoE of 17-18%, RoA of over 1%, NIM@ 2.6-2.7%, well controlled asset quality and a well diversified loan book, we believe the bank’s valuations at 0.95x is quite attractive. We value its 25% stake in UTI. AMC at Rs 18/ share (valued @4% of weighted average AUM for the previous three months). Hence, on an SOTP basis we have arrived at a target price of Rs 532 and rate the stock as an OUTPERFORMER.

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