Fresh impairments come largely from restructured portfolio
Bank of Baroda
Bank of Baroda’s earnings performance for the quarter was better than peers on the back of strong NII (net interest income) growth led by NIM (net interest margin) expansion and flat provisions. High tax rate hurt earnings growth (PBT grew 21% year-on-year). Fresh impairments were at 3.2% of loans with a large share of slippages being explained by restructured loans. We continue to like the bank as it is relatively well-capitalised, with differentiated loan portfolio and available at attractive valuations. Maintain Add (target price unchanged).
PBT growth strong: BoB reported an earnings decline of 6% y-o-y despite 21% growth at the PBT level primarily on higher tax in the investment portfolio. NII growth was impressive at 18% y-o-y on the back of 14% y-o-y growth in loans. Slippages were at 1.9% while fresh restructuring was higher at 1.2% of loans. Gross NPLs (non-performing loans) increased 20 bps quarter-on-quarter to 3.3% while restructured loans declined 20 basis points to 5.8% of loans. A large share of the slippages has come from the restructured loan portfolio.
Revenue growth can surprise if focus shifts: The strong performance on NII comes as a source of comfort as it is giving the bank cushion to manage credit costs with relative ease compared to peers. NIM in the international business seems to have stabilised at 1.2% while NIM in the domestic portfolio improved sequentially (5 bps) to 3%. NII growth from here is highly dependent on NIM expansion. We think this is possible if BoB shifts its focus to the domestic segment from international as NIM is higher by 180 bps at 3%.
We like the progress in business: We maintain our Add rating on the bank with TP (target price) unchanged at R1,050, valuing the bank at 1x book and 7x FY16e EPS (earnings per share). We expect the bank to deliver medium-term RoEs (return on equities) in the range of 14-15% and earnings growth of 10% CAGR (compound annual growth rate) for FY14-16e.
Our slower earnings growth estimates as compared to other public banks are primarily on account of the bank’s strong performance in the treasury portfolio in FY14. We broadly like the bank’s progress and see it as an attractive business among public banks, as (i) the bank is relatively well-capitalised with tier-1 ratio at 9%, (ii) it is one of the few banks with a differentiated loan portfolio with international low-risk business contributing >30% of the overall loans and because of focus to build a retail business, which is closer to SBI from an execution perspective, and (iii) valuations are still inexpensive, especially since the difference between reported book value and adjusted book value is >10%.
Restructuring higher, slippages lower: Compared to the previous few quarters, BoB reported marginally higher deterioration this quarter led by higher restructuring of loans. The bank restructured 1.2% of loans while slippages for the quarter were at 1.9% of loans. A large part of the slippages (40%) for the quarter was in the restructured loan portfolio – a trend that we have been seeing across banks.
Gross NPLs rose marginally by 20 bps to 3.3% of loans with a large share of the rise primarily in the corporate segment. Gross NPLs in the corporate segment increased 70 bps q-o-q to 6.1% while the bank has reported an improvement in the agriculture and retail segments q-o-q. The bank has not sold any loans to ARCs this quarter.
—Kotak Institutional Equities