>BANK OF BARODA: 3QFY12 earnings surprised

■ 3QFY12 earnings surprised on the downside across most operating metrics, be it margins, CASA or provisions, except other income which saw sizable trading gains. As a result, the stock ended down 1.2% over yesterday but almost 3% down from pre-results levels today.


■ Highlights: While loan growth came in surprisingly high at 26% driven partly by a translation
effect of the international book and by corporate and farm credit, CASA mix came off
marginally to 27.2% as did margins down 8bp to 2.99% (in fact, domestic margins came off
16bp to 3.51% led by flattening yields but a continued rise in funding costs). Gains on sale of
liquid mutual fund holdings and FX gains along with muted opex growth helped boost
operating profits. However, a significant 27% sequential increase in restructured loans
(telecom infra sector) as well as rising slippages to 1.6% - the highest in the last 3 years – put a dampener on stock sentiment, although pre-tax earnings grew at a reasonable 14% yoy.


■ Earnings outlook: We factor in 20-22% loan growth with slightly lower margins and rising
credit costs up to FY13e, resulting in 14% and 15% earnings growth in FY12e and FY13e.
However, growth recovers to 26% yoy in FY14e. Clearly, restructured loans are likely to be in
focus for most PSU banks with specific sectoral issues facing the power, airlines and exportrelated sectors.


■ We downgrade to N from OW with a TP of INR889 from INR961: BoB is currently trading at FY13E multiples of 5.6x PE and 1.1x PB, a c9% and 26% premium to its peers (ex- SBI). Given the macro uncertainty and unfolding asset quality risks, we are cutting our target PE and PB multiples to 5-year average levels of 5.5x and 1x respectively from 6.3x PE and 1.2x PB earlier. Our revised price target is INR889, implying potential return (including dividends) of 15.1%. We downgrade the stock from OW to Neutral. We expect the valuation premium to peers will compress as Bank of Baroda’s relatively better-than-peer book quality is showing chinks in the armour. Key downside risk: Management change in Nov-12 


(Chairman retiring). Key upside risk: Fewer asset quality issues than expected.


RISH TRADER