Downgrade Bank of Baroda (BoB) to neutral (earlier outperformer) following the recent negative events – that is alleged forex scam of Rs 6,200 crore. We believe with these series of negative events, the new CEO will have to spend a lot of time correcting past errors especially cleaning up international operations and the SME book, both of which have grown strongly for BoB in the last few years. As such we expect a huge jump in provisioning in the next few quarters starting 3QFY16.
We cut our target multiple on BoB from 1.0x to 0.8x P/BV FY17e. Our new target price is R165 against R215 earlier. We are not revising our earnings yet as we will wait for the new CEO to articulate his new policy on accelerated provisioning.
We believe the alleged scandal is negative for BoB and the entire state owned banking pack. For BoB, this comes on the back of three recent negative events – 1) a recent bill discounting scam in Gujarat by a textile borrower involving Rs 3.5 billion. 2) non-payment of dues by Atlas Group, an Indian jeweller with its main jewellery operations in the UAE. BoB has an exposure of 70 million dirhams or Rs 120 crore through its Dubai branch. The Atlas group owes 20 banks a total sum of Rs 1,000 crore according to press reports. 3) The recent transfer of BoB’s Executive Director KV Ramamoorthy to United Bank due to certain transactions made by the Dubai branch which were allegedly not in compliance with existing rules.