Flash Note

BFSI l India Research

Bank of Baroda
Reco: BUY Reco: BUY CMP
Nifty Sensex

Target Price: INR1,052 Target Price: INR1052 : INR942

5,785 19,292

Upside: 12% Upside: 12%

Q4FY11 Core numbers on track

Bank of Baroda (BoB) reported Net Interest Income growth of 50% YoY (ahead of expectation) driven by robust advances growth and one-off Interest income on IT refund. Due to higher pension provisions, PBT declined by 12% QoQ although, only 4.5% tax provision resulted in better profits growth. Domestic reported NIMs expanded 34 bps QoQ but adjusted for one-off, NIM declined by 12bps QoQ. The banks final pension liability is INR23.8bn, which includes retired employee liability of Rs5.4bn. It has provided INR9.2bn in FY11 whereas INR14.63bn would be amortised in next four years. Although the banks slippages ratio (annualized) increased to 1.14% vs. 0.5% in Q3FY11, however it was much lower than industry average. Gross NPA increased by 14% sequentially, however due to higher provisioning net NPA increased by 6%. Although we expect increase in slippages in FY12, we do not foresee a drastic impact on earnings considering the current low NPA levels and strong coverage ratio.

Stock data
Sector Reuters Code Bloomberg Code No. of shares (mn) Market Cap (INRbn) Market Cap (USDmn) 6m Avg daily t/o (USDmn) BFSI BOB.BO BOB IN 392 369 8,300 9.2

Key catalysts

Better leverage of a high customer base and strong branch network can bring about higher-than-expected business growth, which may positively surprise our earnings estimates. Stronger improvement in the global economy and better cross border trade may lead to sharp increase in fee-based income from global operations.

Stock performance
52-week high / low 1M Absolute (%) Relative (%)

(%)
INR1,052/654 3M 12 M 49.5 23.7

6.7 17.4 (2.2) 7.6

Outlook and valuation

Against the backdrop of a better core performance, we raise our NII and PPP estimate for FY12. Going forward, we expect bank to report NII growth of 16% CAGR over FY1113 and PAT at 17% CAGR, which is inline with our industry expectation. The stock currently trades at 1.5x FY12E ABV (8x FY12E earnings). We believe that it

Shareholding pattern
Public & others 10% DIIs 16% FIIs 17% Promoters 57%

would continue to trade at 1.7x FY12E ABV given its ability to consistently strong core performance, strong international presence, a superior business model and high ROE. A stronger global economy and cross border trade finance may lead to sharp increase in its fee-based income. Maintain Buy with increased price target from INR 1025 to INR1052 on back of revised numbers.

Nifty & stock movement

Key risk
Key risk to our call is a downturn in the global economies in which the bank operates, which would affect its business and asset quality significantly. Key financials (Y/e March) Net interest income (INRbn) Growth (%) Pre-Provision Profit (INRbn) PAT (INRbn) EPS (INR) Growth (%) RoA (%) RoE (%) PE (x) P / BV (x) FY10
59.4 15.9 49.4 30.6 82.1 38.7 1.3 21.5 11.3 2.3

FY11E
88.0 48.2 69.8 42.4 106.5 29.6 1.4 22.6 8.7 1.7

FY12E
99.1 12.6 80.1 46.3 117.8 10.7 1.2 19.5 7.9 1.5

FY13E
117.8 18.8 95.6 56.8 144.7 22.8 1.2 20.4 6.4 1.3

28th April 2011 Amit Jain +91 22 4220 8942 a.jain@pugsec.com Ujjwal Somani +91 22 4220 8915 u.somani@pugsec.com
Bank of Baroda Q4FY11 Flash Note

Source: Company, PUG Research

28 April 2011 l PUG Institutional Research

Quarterly Financial Highlights

(INRbn) Interest Earned Interest Expended Net Interest Income Other income Operating income Total Operating expenses Operating profit Provisions PBT Provision for Tax PAT PPP (ex treasury) EPS Business Gross Advances Deposits CASA Term Deposit CDR Incremental CDR Asset Quality Gross NPAs (Rs mn) Net NPAs (Rs mn) Gross NPA Net NPA Coverage ratio (incl w/off) Key Ratios NIMs C/I ratio ROA Annualised ROE CAR - Basel II
2.4% 54.3% 1.2% 21.3% 14.6% 2.6% 51.1% 1.1% 19.7% 14.6% 3.0% 47.0% 1.4% 25.9% 14.7% 3.0% 40.4% 1.4% 22.2% 14.4% 2.9% 40.4% 1.2% 23.5% 13.3% 3.0% 40.7% 1.3% 24.0% 13.2% 3.2% 38.7% 1.3% 23.5% 12.5% 3.5% 45.2% 1.5% 26.2% 14.5% 20.7 3.8 1.4% 0.3% 81.7% 19.6 4.1 1.3% 0.3% 79.3% 22.6 4.9 1.4% 0.3% 78.4% 24.0 6.0 1.4% 0.3% 74.9% 26.6 7.2 1.4% 0.4% 73.0% 27.2 7.3 1.4% 0.4% 73.1% 27.7 7.4 1.3% 0.4% 85.5% 31.5 7.9 1.4% 0.4% 85.0% 31.3% 31.3% 13.8% 6.3% 1,420 1,986 29.4% 1,401 71.5% (20.0%) 1,489 2,074 30.2% 1,447 71.8% 79.0% 1,562 2,151 29.1% 1,524 72.6% 93.4% 1,750 2,410 27.6% 1,745 72.6% 72.8% 1,856 2,547 28.1% 1,832 72.9% 77.5% 1,930 2,697 29.6% 1,898 71.6% 49.1% 2,072 2,815 29.1% 1,995 73.6% 120.2% 2,287 3,054 28.6% 2,181 74.9% 89.7% 25.0% 9.3% 30.6% 26.7% 10.4% 8.5%

1QFY10
40.3 28.3 12.0 7.0 19.1 9.0 10.1 (0.4) 10.5 3.6 6.9 7.5 18.8

2QFY10
41.4 27.5 13.9 6.0 19.8 9.5 10.3 1.2 9.2 2.8 6.3 9.1 17.3

3QFY10
41.8 25.8 16.0 6.6 22.6 10.0 12.6 2.4 10.2 1.9 8.3 11.2 22.8

4QFY10
43.5 26.1 17.4 7.7 25.1 9.6 15.5 3.0 12.5 3.5 9.1 14.2 24.8

1QFY11
47.3 28.7 18.6 6.2 24.8 9.5 15.3 2.5 12.8 4.2 8.6 14.0 23.5

2QFY11
51.6 31.2 20.4 6.8 27.2 10.6 16.6 1.9 14.7 4.5 10.2 15.5 27.9

3QFY11
56.7 33.7 22.9 6.8 29.7 11.2 18.5 3.0 15.5 4.8 10.7 17.7 29.3

4QFY11
63.3 37.2 26.1 8.3 34.5 15.0 19.5 5.9 13.6 0.6 12.9 18.2 35.5

YoY
45.5% 42.6% 49.8% 8.8% 37.3% 55.8% 25.8% 99.5% 8.3% (82.3%) 42.8% 28.3% 43.2%

QoQ
11.8% 10.3% 14.0% 23.4% 16.2% 34.5% 5.1% 94.2% (12.4%) (87.2%) 21.1% 3.3% 21.0%

Source: Company, PUG Research

Bank of Baroda Q4FY11 Flash Note

28 April 2011 l PUG Institutional Research

Peer Comparison
The stock currently trades at 1.5x FY12E ABV (8x FY12E earnings). We believe that it would continue to trade at 1.7x FY12E ABV given its ability to consistently strong core performance, strong international presence, a superior business model and high ROE. A stronger global economy and cross border trade finance may lead to sharp increase in its fee-based income. Maintain Buy with increased price target from INR 1025 to INR1052 on back of revised numbers.
CMP (INR) State Bank of India Punjab National Bank Bank of Baroda Canara bank Bank of India Union Bank of India Allahabad Bank Indian Bank Corporation Bank Dena Bank Average 2,859 1,195 942 640 481 339 215 246 602 108 Mcap (INR bn) 1,815 379 369 262 253 178 103 106 89 31 ROE (%) FY12E 16.1 24.9 19.5 19.7 15.4 18.6 18.7 20.2 19.3 17.4 19.0 ROA (%) FY12E 0.9 1.7 1.2 1.2 0.8 1.0 1.1 1.5 1.1 0.9 1.1 NIM (%) FY12E 2.6 3.5 2.6 2.7 2.3 2.8 2.8 3.5 2.4 2.5 2.8 Net NPA (%) P/ABV (x) FY12E 1.9 (0.8) 0.4 1.1 1.6 1.2 0.6 0.4 1.0 0.9 0.8 FY12E 2.0 1.2 1.5 1.5 1.9 1.6 1.1 1.2 1.2 1.0 1.4 P/E (x) FY12E 11.4 5.6 7.9 6.5 9.4 6.9 5.8 5.2 5.9 5.3 7.0 Div Yield (%) FY12E 1.4 2.4 2.1 2.1 1.8 2.0 3.5 3.6 3.5 2.7 2.5

Source: PUG Research

Key Risk

Downturn in economies in which the bank operates can affect overseas business significantly. We believe that rising treasury yields may result in significantly lower treasury gains or even MTM losses. Sharper-than-expected increase in slippages may affect profitability.

Bank of Baroda Q4FY11 Flash Note

28 April 2011 l PUG Institutional Research

Financial Summary
Profit and loss (INR bn) Year ending 31 March
Interest income Interest expense Net interest income Growth % Other income - Treasury Gains Total income Operating expenses Pre-Provision Profit Provision - Provision for NPA - Provision for Investments PBT Provision for Tax PAT Growth % PPP (Excl. Treasury) Growth %

FY10
167.0 107.6 59.4 15.9 28.1 7.2 87.5 38.1 49.4 7.0 10.6 (3.8) 42.4 11.8 30.6 37.3 42.1 23.7

FY11E
218.9 130.8 88.0 48.2 28.1 5.1 116.1 46.3 69.8 13.3 9.7 0.5 56.5 14.1 42.4 38.7 64.7 53.7

FY12E
275.2 176.1 99.1 12.6 31.0 5.3 130.2 50.1 80.1 11.0 7.0 0.5 69.1 22.8 46.3 9.1 74.8 15.5

FY13E
326.1 208.3 117.8 18.8 34.4 6.1 152.2 56.6 95.6 10.8 6.4 0.6 84.8 28.0 56.8 22.8 89.6 19.8

Balance sheet (INR bn) Year ending 31 March

Cash balance Advances Investments - Government Securities Fixed assets Current assets Total Assets Equity Capital Reserves & Surplus Shareholders' funds Deposits - CASA deposits - Term deposits Borrowings Subordinated debt Current liabilities Total Liabilities

FY10
355 1,750 612 504 23 43 2,783 3.7 147 151 2,410 715 1,696 44 89 88 2,783

FY11E
452 2,285 713 595 23 52 3,525 3.9 214 218 3,054 901 2,154 49 107 97 3,525

FY12E
524 2,696 915 773 25 55 4,215 3.9 252 256 3,669 1,042 2,627 54 128 108 4,215

FY13E
618 3,236 1,098 928 28 58 5,037 3.9 298 302 4,401 1,261 3,140 59 154 121 5,037

Key Ratios Year ending 31 March

Profitability Ratios EPS (INR) Earnings growth (%) CEPS (INR) PPP / Share (INR) ROAA (%) ROAE (%) Dividend per share (INR) Dividend Payout (%) Efficiency Ratios (%) Cost-Income ratio (Excl Treasury) Other Inc (Excl tr.) / Net Inc (Excl Tr.) Cost Asset Ratio CASA Tax Rates Asset Quality Ratios (%) Gross NPAs Net NPAs Coverage (excl W/off) Provision/ Loans Asset-Liability Profile (%) Capital Adequacy Ratio - Tier I CAR Adv. / Deposit Ratio Equity / Assets Equity / Loans Loan Growth Deposit Growth Balance Sheet Growth

FY10
82.1 38.7 88.4 135.0 1.3 21.5 15.0 21.3 47.5 26.0 1.5 29.6 27.8 1.4 0.3 74.9 0.6 14.0 8.8 72.6 5.4 8.6 22.2 25.3 22.8

FY11E
106.5 29.6 113.2 177.7 1.4 22.6 16.5 17.4 41.7 20.7 1.5 29.5 24.9 1.4 0.3 75.0 0.4 14.7 9.8 74.8 6.2 9.6 30.6 26.7 26.7

FY12E
117.8 10.7 125.2 203.8 1.2 19.5 19.8 18.9 40.1 20.6 1.3 28.4 33.0 1.4 0.4 73.4 0.3 14.5 9.4 73.5 6.1 9.5 18.0 20.1 19.6

FY13E
144.7 22.8 152.8 243.5 1.2 20.4 23.8 18.5 38.7 19.4 1.2 28.7 33.0 1.4 0.4 74.7 0.2 14.5 9.3 73.5 6.0 9.3 20.0 19.9 19.5

Year ending 31 March

Spreads Analysis (%) Yield on Advances Yield on Investments Cost of funds NIM (Calculated)

FY10
7.9 6.8 4.9 2.4

FY11E
8.1 7.3 4.7 2.9

FY12E
8.3 7.2 5.2 2.6

FY13E
8.2 7.2 5.1 2.6

DuPont Analysis (% of avg assets) Interest Income Interest expense Net Interest Income Core Non-Int Income Core Net Total Income Operating Expenses Pre-provision profits (ex Tr) Treasury Net Total Income Provisions PBT Tax PAT (RoA) Leverage (Assets/Equity) ROAE 6.6 4.3 2.4 0.8 3.2 1.5 1.7 0.3 2.0 0.2 1.7 0.5 1.3 18.0 21.5 6.9 4.1 2.8 0.7 3.5 1.5 2.1 0.2 2.2 0.4 1.8 0.4 1.4 17.1 22.6 7.1 4.5 2.6 0.7 3.2 1.3 1.9 0.1 2.1 0.3 1.8 0.6 1.2 16.3 19.5 7.0 4.5 2.5 0.6 3.2 1.2 1.9 0.1 2.1 0.2 1.8 0.6 1.2 16.6 20.4

Valuation
Dividend Yield (%) BVPS (Excl. Revaluation Res) Adjusted BVPS P/E (x) P/PPP (x) P/ABV (x) 1.6 413 397 11.3 6.9 2.3 1.8 556 536 8.7 5.2 1.7 2.1 651 626 7.9 4.6 1.5 2.6 769 740 6.4 3.8 1.3

Bank of Baroda Q4FY11 Flash Note

28 April 2011 l PUG Institutional Research

Rating System (In Absolute Terms)

BUY HOLD SELL = = = Expected to give a return of 10% or more over a 12 months' time frame. Expected to give a return of -10% to +10% over a 12 months' time frame. Expected to give a return of -10% or lower over a 12 months' time frame

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Bank of Baroda Q4FY11 Flash Note