We downgrade BoB (Bank of Baroda) to Reduce from Neutral, and cut our target price to R590 from R820, as we believe asset quality risks will continue to derail BoBís earnings trajectory over the next several quarters. We are increasing our delinquency forecast for FY13F to R50.6 billion from R41.7 billion (FY12F loan delinquency: R34.4 billion) and expect loan loss provisions to increase to 97 basis points from 72 bps in FY12.
We raise our delinquency ratio estimate from 1.17% in FY10 to 1.51% for FY12F (forecast); in Q1FY13, the annualised delinquency ratio was 1.8%. We note, a slowing economy is leading to widespread deterioration across several sectors and we believe BoBís NPL (non-performing loan) book is still beginning to build up and hence we expect the delinquency ratio to go up to 1.76% by FY13. A key risk event coming up is the expected change in top management later in CY12 and this transition is likely to reiterate the asset quality risk to earnings.
Valuation: Our target price implies 0.83x FY13F ABV (adjusted book value) and 5x(times)FY13F.
EPS: BoB currently trades at 0.88x FY13F ABV of R715, 1SD (standard deviation) below its historical mean of 1.1x one-year forward ABV. At our target price of 590, BoB trades at 0.83x FY13F ABV and 5x FY13F EPS.
Q1FY13 results highlights and takeaways from the analystsí meeting: Net interest income came in 5.5% below our estimates, on the back of loan growth of 23% year-on-year (flat q-o-q) and a 23bps decline in NIM (net interest margin) to 2.73%. Non-interest income grew 20% y-o-y but fell 14% q-o-q as fee income remains muted y-o-y and lower than expected trading income.
CASA deposits grew 14.4% y-o-y, with savings deposits growing 15.1% y-o-y and current account deposits growing 12.3% y-o-y. GNPLs increased 19% q-o-q, with the GNPL ratio inching up 31bps to 1.84%, due to higher slippages of R12.6 bn and lower write-offs of R1.96 bn.
The bank restructured loans to the tune of R7.7 bn during the quarter. Provision cover, including technical write-offs remains stable at 79%. The bank has cumulatively restructured loans to the tune of R194.91 bn, of which R7.7 bn was restructured in Q1FY13 and R52.8bn was restructured in Q4FY12.