Bank of Baroda’s (BoB) Q1’09 results were slightly below our expectations.
Advances grew modestly by 4% on a sequential basis, while on a yearly basis, it rose by 42%. High interest rates and the prevailing economic slowdown negatively impacted the first quarter as demand lowered across all the segments.
We expect that the advances would grow at 24% for the next three years, which is lower than the 35% average growth recorded in the previous three years. This slowdown in advances will impact the bottom line.
NIMs fell in Q109 both on a sequential as well as yearly basis on account of adjustments made under the RBI guidelines and the mandated low-rate lending to small farmers at 7%.
Moving forward, while the Bank has increased its benchmark prime lending rate (BPLR) by 75 bps, we expect margins to remain under pressure as further monetary tightening can’t be ruled out, which along with the low-rate lending will affect margins.
The Bank presently has a CASA ratio of 36.86%—a sequential increase of 86 bps. It opened 125 branches in FY08 and is planning to add 100 more branches in FY09. As a result, we expect the CASA ratio to increase.
We have valued Bank of Baroda using the three-stage discounted equity cash flow method and have assumed a 15% cost of equity and a terminal growth rate of 8.3%.
This gives the consolidated business a valuation of Rs313. We are reducing our target price from our previous recommendation and changing our rating on the stock from Buy to HOLD.