Bank of Baroda’s (BoB’s) net interest income (NII) grew 14% to Rs12.05 billion in Q1FY10 from Rs10.57 billion in Q1FY09 on back of strong growth in advances (28.3%) despite the slight decline in margins from 2.76% during Q1FY09 to 2.37% during Q1FY10.
Net profit grew 84.8% to Rs6.85 billion in Q1FY10 from Rs3.71 billion in Q1FY09 on back of strong trading profit (180.2% rise), lower growth in operating expenses (16.7%) and Rs3.6 billion write-back of investment depreciation in Q1FY10 as against a provision of Rs2.19 billion in Q1FY09.
Non-interest income saw strong growth of 37.2% to Rs7.03 billion in Q1FY10 from Rs5.13 billion in Q1FY09. The primary contributors being treasury gains, fee-based income and exchange traded profits.
The bank saw some pressure on its margins due to recent PLR cuts as well as liquidity overhang. Domestic net interest margin (NIM) declined to 2.57% in Q1FY10 as compared to 2.92% in Q1FY09. Similarly, global NIM also declined to 2.37% in Q1FY10 as compared to 2.76% in Q1FY09.
The management has guided that they will take NIM to 2.75% levels by the end of FY10.
BoB’s overseas operations contributed 23.5% in total business and 23.2% in total gross profit during Q1FY10. Having lower cost/income ratio (19.8% during Q1FY10) as compared to around 52% in domestic operations, contribution to operating profit is even higher.
Gross NPA for overseas operations is also lower. It stands at 0.52% for Q1FY10 as compared to 1.75% for the domestic operations during Q1FY10.
At the current market price of Rs.417, the stock is trading at 6.0x its FY10E earnings and 1.0x its FY10E ABV. We are revising our earnings estimates upward for FY10E and introducing FY11E numbers.
We expect full year profits of Rs25.48 billion and Rs29.51 billion for FY10E and FY11E, respectively. This would result into an EPS of Rs.69.7 and Rs.80.7 for FY10E and FY11E, respectively. During the same period, adjusted book value is estimated at Rs403.4 and Rs467.9, respectively.
We maintain a BUY rating on the stock with the revised target price of Rs.504 revised upward from Rs.377 earlier). At the target price, the stock would trade at 1.25x its FY10E adjusted book value.
In our view, the stock remains a re-rating candidate due to improvement in its return profile (RoA & RoE); consequently, BoB remains one of our preferred pick in the banking sector space.