Recommendations » India

Bank of Baroda 3QFY2013 performance highlights and results update

Contributed by Angel Broking

Bank of Baroda (BoB) reported a subdued operating performance, with 13.5% yoy decline in operating profit, on the back of lower treasury income (on high base due to one-off gains in 3QFY2012) and higher slippages. Continued asset quality pressures, resulted in 60.6% yoy increase in loan loss provisioning and hence the PBT level earnings declined by 30.9% yoy. However, lower effective tax rate capped the net profit decline to 21.6% yoy.

Domestic NIM declines qoq; Asset quality pressures higher sequentially: During 3QFY2013, the bank registered a moderate 11.6% yoy growth in its domestic loan book (aided by healthy SME lending), while the international loan book grew at a healthy pace of 22.0% yoy (partly aided by INR depreciation). The domestic CASA ratio improved sequentially by 47bp to 32.2%. The bank’s domestic yield on advances declined by 18bp on account of higher slippages, which led the domestic NIM to decline by 15bp qoq to 3.08%. The bank reported a subdued performance on the non-interest income (excluding treasury) front, with a decline of 7.7% yoy, on back of a sharp 25.1% yoy decline in forex income and subdued performance on the recoveries and fee income front. Trading profits declined sharply to Rs.136cr compared to Rs.386cr in 3QFY2012 (on high base, as the bank had booked substantial gains on sale of liquid investments in 3QFY2012). Hence, the overall non-interest income for the bank declined by 26.9% yoy. The bank witnessed higher asset quality pressures during the quarter, as addition to NPA and restructured book increased qoq. The annualized slippage ratio for the bank came in higher at 2.8%, compared to 2.0% in 2QFY2013 and 1.7% in 3QFY2012. Gross and net NPA levels for the bank increased by 24.5% and 41.0% qoq respectively, on an absolute basis. Even going ahead, the Management exhibited caution on the asset quality outlook for the next few quarters. Additionally, the bank restructured loans worth Rs.2,199cr (higher than Rs.1,417cr restructured during 2QFY2013), thereby taking its cumulative restructured book to Rs.22,993cr. Going ahead, as per the Management, the restructuring pipeline for the bank would remain sizable at ~Rs.2,500cr for 4QFY2013. The PCR for the bank dipped significantly by 484bp qoq to 70.9% (though it still remains the best amongst large PSUs).

Outlook and valuation: BoB has been rerated in recent years due to healthy improvement in its core profitability. After the sharp correction recently, the stock trades at valuations of 0.9x FY2014E ABV. We recommend Buy rating on the stock with a target price of Rs.935.