Thursday, August 9, 2012

>BANK OF BARODA: Asset quality disappoints

BoB’s Q1FY13 bottomline (Rs11.4bn, 10% YoY) came in below our estimates driven primarily by higher provisioning. Asset quality deteriorated with slippage rate at 1.7% and GNPA jumping by 20% QoQ although restructured assets were largely stable at 5.5% of loan book (vs ~8% for peers). Current valuations (0.8x FY14E ABV) largely factors in potential risks arising from the scheduled change in the management team. We recommend investors to Accumulate the stock around the stress case value of Rs650 with a revised price objective of Rs800.
Asset quality slips: BoB’s asset quality matrices deteriorated during Q1FY13 with GNPA jumping ~20% QoQ and reached 1.84% as slippage rate sustained at high level (1.7% vs 2% last quarter). However, restructured book inched up only marginally to 5.5% of loans book and remains below ~8% for most peers. While the asset quality matrices still remain better than peers, the poor show during Q1FY13 does remove some of shine off BoB.

NIM contracts by 25bps QoQ: Global NIM for BoB contracted by 25bps sequentially, which can be traced to lower loan yields while cost of deposits too inched up marginally (~10bps QoQ). From geographical perspective, domestic NIMs were stable QoQ while overseas NIMs were down 15bps QoQ.

Topline in line: BoB’s Q1FY13 performance on NII and non-interest income front was largely in line with expectations with Net total income growth of 21.5% YoY. Healthy credit growth of 23% helped counter the 25bps QoQ pressure on NIM. Meanwhile, the non-interest income growth (20% YoY) received a boost from strong recoveries (on YoY basis) and healthy forex gains.

Strong credit growth led by SME segment: The advances book grew by a strong 23% YoY primarily driven by the SME segment (21% YoY). The continued focus on SME segment for driving the loan book growth seems to be driven by desire to maintain strong yields and hence NIMs. The loan book growth benefitted from currency depreciation which propped the overseas loan book growth to 41% YoY.

Back to stress value, accumulate on low valuations,: At current market price of Rs673, the stock trades at 4.6x FY2014E EPS and 0.8x FY2014E ABVPS. In our view, current valuations are factoring in extreme negative expectations, likely due to scheduled change in the management team (CMD and ED retiring in mid-FY13). However, our stress case analysis suggests a stress value of Rs650 for BoB. During last few months, the stock has tested Rs650 levels on three instances and has witnessed a strong bounce back from the level. We continue to believe that at current valuations most of the risks arising from challenging operating environment are factored in. As a base case, we do not expect management change this year to lead to material change in asset quality profile other than the general pressure due to weak economic activity. We recommend investors to Accumulate the stock around stress case value of Rs650 with long term perspective and a revised price objective of Rs800.