Results ahead of estimates: Bank of Baroda (BoB)?s Q3FY2011 results were ahead of estimates as the net interest income (NII) grew by 43% year on year (YoY) to Rs2,292 crore while the net profit grew by 28.5% YoY to Rs1,069 crore. A strong growth in the NII compensated for the increase in provisions during the quarter, leading to a healthy growth in profits. Margins increased to 3.2%, which is a growth of 18 basis points on a sequential basis, led by a jump in domestic margins. The gross and net non performing assets (NPA)s continue to remain broadly at Q2FY2011 levels ie at 1.32% and 0.36% respectively. During the quarter the bank also made a provision of Rs309 crore (for M9FY2011) for pension liabilities.
Robust business growth: Led by an expansion in margins and a strong growth in advances, the NII grew by 43% YoY and 12.5% quarter on quarter (QoQ). Advances increased by 32.7% YoY and 7.4% QoQ contributed by a strong growth in the domestic and overseas advances. The credit to deposit ratio climbed to 73.6% compared to 71.5% in Q2FY2011.
Upward momentum in margins continues: Overall margins went up by 18 basis points to 3.2% on account of an increase in the domestic margins which increased by 20 basis points QoQ to 3.82%. Re-pricing of advances, higher credit deposit (CD) ratio and a tight control on the cost of funds contributed to the increase in domestic margins.
Non-interest income growth mute due to lower treasury income: The overall non-interest income showed a flattish growth as it grew by 2.6% YoY, mainly due to a decline in the treasury income. However ex-treasury, the non-interest income grew by 14% YoY.
Asset quality stays healthy: BoB continues to maintain a superior asset quality compared to its peers due to control on slippages and improved recoveries. Incremental slippages were at ~1% for M9FY2011 (Rs1,230 crore) which is much lower compared to peer banks like Bank of India, Punjab National Bank, Union Bank of India etc. The provision coverage improved to 85% (including written off accounts).
Valuation: BoB continued to deliver a strong operating performance with a consistent improvement in all the key parameters. Superior asset quality, higher margins and a stable current account savings account (CASA) ratio remain the key drivers for the bank?s earnings growth. We expect BoB?s earnings to grow at a compounded annual growth rate (CAGR) of 20% over FY2010-13 led by a 23% growth in advances. This should lead to a return on assets (ROA) and return on equity (ROE) of 24% and 1.1% respectively. We have revised our target price to Rs998 (1.8x FY2012 book value) in view of the macro head winds ahead. We maintain our Buy recommendation on the stock.
