The sharp up move seen in the stock (+16% on the results day) belies the weak operating performance and weaker asset quality, the latter not as bad as the Street feared after PNB’s poor numbers, is perhaps the big relief. That said, it’s a stock with a decent capital buffer and better asset quality metric than most peers. We will be buyers for 40% FY15-18 EPS CAGR (compound annual growth rate in earnings per share). Retain Buy but tweak PT (price target) lower to R230.
Profitability takes a beating
Profit was down 48% year-on-year (40% below JEFe—Jefferies estimate) owing to weaker top line and higher credit cost. NII (net interest income) was up +1.5% y-o-y. NIM (net interest margin) was down 3 basis points sequentially to 2.17% while loan growth was muted at +7.8%. Fee income was weak, up +4.7%. Credit costs was at 177bps, up +54bps. Core PPOP (pre-provision operating profit),excluding trading profits, was down 6.3% y-o-y (11% below JEFe).
Loan growth was weak (+7.8% y-o-y) driven by 7.2% growth in domestic book and 9.1% growth in international book. CASA (current account, savings account) ratio improved to 3%. Profitability metrics were weaker with RoE (return on equity) at 7.4% and RoA (return on assets) at 0.35%. CET1 (common equity Tier-1) and Tier-1 are at 9.35% and 12.28%, respectively.
Asset quality saw bunched up restructuring
Absolute slippage at R17.9 bn was lower sequentially (Q3: R28.5 bn). Slippage ratio was at 1.8% vs. 3.2% sequentially. In FY15, 36% of slippage came from restructured assets vs. 31% in FY14.
Assuming a two-year lag for restructured assets to season, slippage ratio from restructured assets was 16% in FY15 vs.13% in F14. Total restructuring for FY15 was R74 bn (Q4: R40.1 bn). Gross NPA (non-performing assets) improved to 3.73%. The domestic book carries restructured assets of 8% of loans, while for the bank net impaired assets i.e. Net NPA and Restructured book, are at 8% of loans.
Change in estimates
We cut FY16e (estimates) loan growth to 16% keeping the numbers at 22% for FY17e and FY18e. We remain less enthusiastic about NIM improvement, expecting NIM to only show a gradual improvement. Fee income too is likely to remain tepid.
The topline weakness would see an offset from expenses that are more pro-cyclical with inflation and help from the higher base of FY15. With asset quality largely in line with expectation, we continue to bake in 65bps of credit cost (no change).
As a result FY16e & FY17e EPS is lowered by 12% and 7%, respectively. We introduce FY18 estimates with FY15-18e core-PPOP CAGR at 22% and EPS CAGR at 39%.
Valuation/risks
We value Bank of Baroda at R230—1.4x book (March 16e) and 6.7x 12M (month) rolling earnings (Mar 17e) versus five-year average of 1.2x (times) book and 6.2x earnings. Downside risk are continued weakness in loan growth , asset quality deterioration and NIM compression.
Q4FY15 earnings summary
Operating numbers were weak while asset quality worsened but was perhaps better than beaten down expectations.
Loan growth was weak (+7.8 % y-o-y ) driven by a 7.2 % growth in domestic book and 9.1 % growth in international book.
Domestic growth was driven by corporate (+23% y-o-y), and housing (+15.3% y-o-y).
CASA ratio improved to 33%. Profitability metrics were weaker with RoE at 7.4% and RoA at 0.35%. CET1 and Tier 1 are at 9.35% and 12.28% respectively.
Asset quality worsened with bunched up restructuring. Absolute slippage at R17.9 bn was lower sequentially.
Slippage ratio was at 1.8% vs. 3.2% sequentially. In FY15, 36% of slippage came from restructured assets vs. 31% in FY14. Assuming a two-year lag for restructured assets to season, slippage ratio from restructured assets was 16% in FY15 vs. 13% in F14.
Total restructuring for FY15 was R74 bn (Q4: R40.1 bn). Gross NPA improved to 3.73%. The domestic book carries restructured assets of 8% of loans, while for the bank net impaired assets i.e. Net NPA and Restructured book, are at 8% of loans.
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