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Industry Banking

Stock Metrics BSE Group A

BSE Code 532134

Bloomberg Code BOB IN

Face Value 10

Market Data

Market Cap (` Crs) 36029

52 week High/Low 1050/488.5

Average Volume 101173

CMP ` 840

Shareholding Pattern

Research Analyst Anshuman Jain anshuman.jain@inventuregrowth.com Ph: 022- 40751515 Extn: 562 Divya Kant divya.kant@inventuregrowth.com Ph: 022- 40751515 Extn: 562 Date: January 05, 2011

Bank of Baroda Bank of Baroda (BoB) is the fourth largest state-owned bank, with the Government of India holding of 53.8%. The bank has a balance sheet size of around `2.7trn. With over 3,202 domestic branches and 1,443 ATMs the bank provides wide range of banking services to a customer base of 3.5+ Crs. BoB is known as the international bank of India as it has one of the largest branch networks in foreign countries. BOB has presence in over 25 countries with 75 overseas branches/offices, which generates close to 25% of its total business. Valuation: BoB has consistently delivered superior results and has shown improvement in the quality of earnings (RoAA of 1.27% and RoAE of 23.98% as of H1FY11), coupled with healthier asset quality compared to its PSU peers. With improvement in the quality of earnings and marked improvement in asset quality, we expect the bank to outperform in the coming fiscals. At CMP of `840 the bank is trading at 1.5x FY12E ABV. The bank delivered RoE of over 22% and RoA of 1.2% for FY10. With its conservative approach and transparent and qualitative performance, we expect the bank to outperform its peers going forward. Hence, we recommend a ‘BUY’ rating on the stock, with a price target of `1080/- (1.9x FY12E ABV of `568.7/-) Key Financials Year Ended March FY09 FY10 FY11E FY12E NII 5123.4 5939.5 7853.3 9169.6 Other Income 2757.7 2806.4 3065.7 3446.3 Net Profit 2227.2 3058.3 3852.2 4462.1 EPS(`) 60.9 83.7 105.4 122.1 P/E(x) 13.8 10.0 8.0 6.9 P/BV 2.4 2.0 1.7 1.4 ROE 18.6% 21.9% 23.1% 22.3% ROA 1.1% 1.2% 1.3% 1.2% ABV per share (`) 340.1 396.8 474.8 568.7

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Company Description:

Bank of Baroda is the 4th largest public sector bank in India with a loan book of ~US$39bn. BOB is highly concentrated in West India with around 50% of its branches located in Gujarat, Maharashtra and Rajasthan. Government of India holds ~53.8% in the bank. With recent capital infusion of close to `35bn, GOI stake will increase to 58% from current 53.8%.

BoB is the fifth largest bank in terms of branch network. It has shown a tremendous growth in business since FY07. While its total business posted a CAGR of 26% during FY07-10, GNPA improved from 2.50% to 1.37% in the same period. Its share of overseas advances to total advances increased from 16% to 25% during FY06-FY10 period.

With strong domestic franchise (3202 branches) and 75 overseas branches, the bank is well-positioned to grow its credit portfolio at an annualized rate of 22% over FY10-FY12E.

Due to lesser dependence on bulk deposit and improved CASA Ratio, we believe that the bank will be able to maintain margins at the current levels.

BoB improved its ROE from 15.5% in FY07 to 22% in FY10. Going forward, we believe with improved operating metrics, ROE can improve further to 23%-24% in coming fiscals.

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During H1FY11, the bank has opened 104 new branches taking the total number of branches to 3202…

Investment Arguments Improving margins and domestic CASA… BoB continues to strengthen its retail liabilities franchise by expanding its branch network (currently 3202 branches), which augurs well for future funding costs. We expect the bank to maintain 35%+ (domestic) CASA share over FY10-12. A higher CASA share would give it an edge over peers in protecting margins. In spite of BoB’s credit-to-deposit being flat yoy at ~72%, its domestic NIM has improved on account of the tight control on its cost of funds. We expect NIMs to stabilize at ~2.8% in FY11 and FY12E. Strategic Presence to enhance growth… BOB has presence in strategically important and industrially developed areas of Maharashtra and Gujarat and also in agricultural belt of India. Bank’s network of domestic branches as on 30th September, 2010 was 3,202 & no. of ATMs were 1,443. During H1FY11, Bank opened 104 new branches and merged two existing branches.

Around 36% of its branches are in rural areas; this helps BoB to mobilize low cost deposits from the high potential rural areas. Furthermore, BoB plans to open 300 more branches by the end of FY11, for which it has already received authorizations, thereby enhancing BoB’s focus on SME and retail segment leading to better margins and business growth. Strong fee-growth potential… Fee income has been management’s key focus area, and has started picking up in recent quarters. Fee income grew 23% YoY and 16% QoQ in 2QFY11 to `5b. Fees excluding forex grew 24% YoY and 29% QoQ to `4b. Moreover, the share of fee income in non-interest income has improved from 68.6% a year ago to 73.7% in 2QFY11.

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The bank is more corporate and SME focused with a 41% and 16% share respectively… Loan and deposits growth continues to be higher than systemic growth…

On back of branch expansion and growth in business and corporate activities, management remains confident of 20%+ fee income growth in FY11 and expects fee income growth in line with loan growth. We expect fee income to grow by 22% and 25% for 2011 and 2012 respectively. Improved Operating Efficiency… BoB’s management strongly believes that improved productivity is a result of sharper focus on technology and greater leverage from current branches. In 2QFY11, the cost-to-income improved significantly to 39.1%, leading to strong operating profit growth. In addition, the management plans to add 300 branches to its present 3,202-strong network. Hence, we expect cost-assets to stabilize around 1.4% in the coming fiscals. Besides, BoB has achieved 100% CBS branches in 2010. This would bring in operational efficiency, leading to reduced cost of operations and greater leverage of technology and man power. We expect the Cost to Income ratio to stabilize to 40.8% by 2012. SMEs and retail segments driving loan growth… Most of BoB’s credit growth is driven by the SME and retail segments. We expect the bank’s business growth to be healthy, given likely improvement in the credit cycle in FY11. We expect growth to be higher than the industry and assume 22% credit growth CAGR over FY10-12 with increased credit demand coming from the retail and SME segments.

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Expansion plans to drive CASA growth… Bank of Baroda continues to invest in its aggressive branch expansion plans to take advantage of the business opportunities available in India and various countries around the world. BoB has a strong branch network of 3,202 & 1,443 ATMs. During H1, FY11, Bank opened 104 new branches and merged two existing branches. Furthermore, the bank proposes to open 300 more branches by the end of FY11, for which it has already received authorizations, which will further boost its CASA deposits (currently at 35%-domestic). Asset quality stable…Slippages under control… BoB is well known for its conservative approach along with consistent business growth. BoB’s asset quality has been the strongest over the last few quarters relative to other large PSU peers. In addition, NPA recognition for BOB is already system based, and this eliminates any large negative surprises that have been reported for some peers. Gross NPAs at 1.4% and restructured loans at 2.8% of the loan book are the lowest among peer banks. Although, Gross NPAs rose 2.3% qoq, NPA coverage ratio stood strong at 73.1% excluding technical write-offs. Including technical write-offs, it stood at 85.6%. Management has contained slippages below its target of 1.25% for the past six quarters and expects it to maintain around similar levels in the coming fiscal. With economic revival and strong growth prospects, we expect asset quality to improve going further.

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Capital Adequacy…So far reasonable… BoB reported capital adequacy of 14.4% for FY10, which is much higher than the RBI’s stipulated norm of 9%. Recently, BoB received GOI capital infusion of `35bn and assuming current market prices; the infusion would lead to ~10% dilution and would take the government’s stake in BoB from 54% to 58% and lead to ~175bps increase in BoB’s Tier 1. This will act as a good cushion for bank and it need not go for any additional capital. Best-in-class return ratios to drive stock performance… BoB’s return ratios have been highest among the PSU banks, and we expect the higher return ratios to be sustained. BoB’s ROE of ~22% is one of the best in the industry, with peer ROEs at 16-20%. Superior margins due to a solid deposit franchise coupled with significant improvement in core fee income would aid superior return ratios. We expect the bank to post superior ROE at 23% for FY12E and thus remain premium to its PSU peers. Strong Q2FY11 performance…exceeds expectations…

• BoB reported PAT growth of 61% YoY in 2QFY11 on back of strong NII growth and lower provisions.

• NII grew 47% YoY mainly on the back of sharp improvement in margins and strong loan growth. Domestic NIM improved 73bps YoY to 3.62% and global NIM improved 39bps YoY to 3.02%.

• Sequential increase in margins, considering the rise in cost of deposits and fall in CD ratio from 73% to 71.5% during the quarter. Loans grew 4% QoQ and 30% YoY to `1.93t and deposits grew 6% QoQ and 30% YoY to `2.7trn.

• Domestic CASA ratio improved from 35.2% to 35.9% QoQ.

• Slippages during 2QFY11 were `3b (0.7% annualized slippage ratio). PCR including technical write-offs was reported at 86%.

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Spreads in countries abroad may not be as healthy as in India…might impact margins…

Risks and Concerns Rising G-Sec yields might impact treasury profits… The current rise in yields beyond 8% will result in MTM losses for PSU banks, as they will have to set extra provisions for the same. However, rising G-Sec yields do not pose huge risks for BoB as the bank’s AFS portfolio as of Q2FY11 stood at `140bn with an M-duration of 2.5years implying a 0.5% change in the yields would have impact of ~5% of FY11 net profit. Slower than expected credit off take… BOB’s has set above industry credit growth target of 22-23% for the coming fiscal, which may get upset with lower than expected economic growth, inching inflationary pressures and increasing interest rate scenario. Asset quality…So far reasonable… Lower than expected recoveries and higher delinquencies can significantly impact earnings growth as well as balance sheet quality. However, we believe NPAs to remain under control for Bank of Baroda. Moreover, the bank has minimum exposure to sectors which have been in news for while now. (MFI – `1.4bn, Telecom – `45bn of which no exposure to new players and Aviation – `25-30bn) Global expansion might be expensive… susceptible to rising rates… The bank is growing rapidly on the international front and plans to continue its growth globally. Although it is a positive sign, there is a concern of forex losses that could be reported by the bank in the future quarters due to adverse fluctuation in currency. In addition, International exposure constitutes 25% of total loan book and has been a drag on overall margins in FY10. Margins have improved over the last 2 quarters in the international book due to rising yields, but a tightening in

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global liquidity represents a risk on margins due to rising cost of funds, coupled with impact on asset quality as some of the mid-corporates may not be able to service loans at higher rates. Further spreads in countries abroad may not be as healthy as in India and asset quality concerns could continue to weigh in overseas branches. Valuation: At CMP of `840 the bank trades at 1.5x FY2012E Adjusted book value of `568.7 and 6.9x FY12E EPS. RoA is likely to remain strong at ~1.2% and increased leverage will drive RoEs to ~22%+ in FY11 and FY12E. We believe BoB with robust advance book growth and steady NIMs will result in strong earnings growth. Bank of Baroda continues to perform on asset quality front as evident from the lowest slippages to advances ratio. Hence, we value the bank at 1.9x FY12E Adj. BV of `568.7 and arrive at a target price of `1080, which would give 30% upside and recommend ‘BUY’ rating on the stock.

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Sector view:

We expect the banking sector to be amongst the strongest performers over the next couple of years, with at least 20% credit growth for the sector as a whole, driven by strong GDP prospects, reasonable (although rising) domestic interest rates and increasing capital inflows from abroad. In our view, the expected increase in interest rates will not affect the banking sector negatively, as it will be outweighed by the improvement in credit growth and fee income coupled with a sharp reduction in NPA losses as economy revives. With the economic growth picking up pace and the investment cycle on the way to recovery, we believe that growth opportunities for Indian banks are immense. The revived credit off take (both from the food and non food segments) and structural reforms have paved the way for a change in the dynamics of the sector itself. We expect credit demand to pick up rapidly in the current financial year as industries will need more funds to expand operations in an economy forecasted to grow more than 8.5 % in the coming years. Moreover retail businesses of the private banks will do well going forward on the back of demand pickup in mortgage loans, car loans and personal loans. Thus we expect strong core operating performance by the banking sector driven by robust loan growth, stable NIMs, along with strong rise in core fee income.

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Index Comparison

BoB has continuously outperformed the Sensex and the Bankex….

Provision coverage to remain in the comfort zone of 70%+ levels…

C/D ratio expected to improve going further…and stabilize around 74-75%

Performance Chart

.

EPS on y-o-y basis shows a rising trend, which depicts a healthy future growth…

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Profit and Loss Statement ` Crs

Particulars (Year end – March) FY08 FY09 FY10 FY11E FY12E

Interest Earned 11,813.5 15,091.6 16,698.3 21,823.3 26,913.1

Interest Expended 7,901.7 9,968.2 10,758.9 13,970.0 17,743.5

Net interest income 3,911.8 5,123.4 5,939.5 7,853.3 9,169.6

Other Income 2,051.0 2,757.7 2,806.4 3,065.7 3,446.3

Net total income 5,962.8 7,881.1 8,745.8 10,919.0 12,615.9

---Payments to/Provisions for Employees 1,903.8 2,348.1 2,350.9 2,703.5 3,109.0

---Other Expenses 1,130.5 1,227.9 1,459.7 1,722.4 2,032.5

Total Operating Expenses 3,034.3 3,576.1 3,810.6 4,426.0 5,141.5

Operating Profit before prov. & Cont. 2,928.5 4,305.0 4,935.3 6,493.1 7,474.4

Total Provisions 721.4 962.1 697.2 990.0 1,100.0

Profit before Tax 2,207.1 3,342.9 4,238.1 5,503.1 6,374.4

Provisions for Tax 771.6 1,115.7 1,179.7 1,650.9 1,912.3

Tax Rate (%) 35.0 33.4 27.8 30.0 30.0

Net Profit 1,435.5 2,227.2 3,058.3 3,852.2 4,462.1 Source: IGSL Research

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Balance Sheet Data ` Crs

Particulars Year end - March FY08 FY09 FY10 FY11E FY12E

Share Capital 365.5 365.5 365.5 365.5 365.5

Reserves and surplus 10678.4 12514.2 14740.9 17891.0 21475.6

Net-worth 11043.9 12879.7 15106.4 18256.5 21841.1

Deposits 152034.1 192397.0 241044.3 289253.1 347103.7

Borrowings 3927.1 12767.9 13350.1 15352.6 16887.9

Other Liabilities and Provisions 12594.4 8627.7 8816.0 9533.1 10963.1

Total Capital and Liabilities 179599.5 226672.2 278316.7 332395.3 396795.8

Balances with RBI and banks 22299.3 24087.1 35467.1 38252.5 41104.5

Investments 43870.1 52445.9 61182.4 73418.8 86634.2

Advances 106701.3 143251.4 175035.3 213543.1 260522.5

Fixed and other assets 6728.8 6887.8 6632.0 7181.0 7827.1

Total Assets 179599.5 226672.2 278316.7 332395.4 396088.4

Source: IGSL Research

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Financial Valuation and Ratios

Operating Ratios FY08 FY09 FY10 FY11E FY12E Book Value (`) 302.1 352.4 413.3 499.5 597.5 P/BV 2.8 2.4 2.0 1.7 1.4 Adjusted BV 288.6 340.1 396.8 474.8 568.7 P/ABV 2.9 2.5 2.1 1.8 1.5 EPS 39.3 60.9 83.7 105.4 122.1 PE(x) 22.6 14.6 10.6 8.4 7.3 Net Interest Margins 2.7% 2.7% 2.5% 2.8% 2.7% Profitability ratios (%) FY08 FY09 FY10 FY11E FY12E ROAE 14.6% 18.6% 21.9% 23.1% 22.3% ROA 0.9% 1.1% 1.2% 1.3% 1.2% Other income/Net income 34.4% 35.0% 32.1% 28.1% 27.3% Interest Expended/Interest Earned 66.9% 66.1% 64.4% 64.0% 65.9% Cost to Income Ratio (%) 50.9% 45.4% 43.6% 40.5% 40.8% Asset Liability Profile (%) FY08 FY09 FY10 FY11E FY12E Advances/Deposit ratio 70.2 74.5 72.6 73.8 75 Investment/Deposit ratio 28.9 27.3 25.4 25.4 25.0 Gross NPA to Advances 1.86 1.29 1.37 1.42 1.37 Net NPA to Advances 0.46 0.31 0.34 0.42 0.40 CASA Ratio 31.2 29.6 29.6 31.0 32.0 Provision Coverage Ratio (calc) 75.1 75.6 74.9 70.2 70.5 Capital Adequacy Ratios (%) FY08 FY09 FY10 FY11E FY12E Tier I 7.6 8.5 9.2 9.2 9.0 Tier II 5.3 5.6 5.2 4.2 3.7 CAR (%) 12.9 14.1 14.4 13.4 12.8 Growth ratios (%) FY08 FY09 FY10 FY11E FY12E Net interest income 9.3 31.0 15.9 32.2 16.8 Advances Growth 27.6 34.3 22.2 22.0 22.0 Deposits Growth 21.7 26.5 25.3 20.0 20.0 Operating Expenses 19.3 17.9 6.6 16.1 16.2 Net Profit 39.9 55.1 37.3 26.0 15.8

Source: IGSL Research

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Peer Comparison

BOB is the fourth-largest PSB in India with a business size of `4.1 trillion. The stock trades at 1.5x FY12E ABV and 6.9x FY12E EPS, at a marginal premium to PSBs of similar size. We believe that the bank will continue to trade at a premium given its ability to consistently deliver strong earnings growth, good international presence, a superior business model, and 22%+ ROEs.

Bank of Baroda

Bank of India

Canara Bank Punjab

Natl.Bank St Bk of

India Union Bank

(I) Profit and Loss

Interest Earned 16698.34 17877.99 18751.96 21466.91 70993.92 13302.68 Interest Expended 10758.86 12122.04 13071.43 12944.02 47322.48 9110.27 Payments to/Prov for Employees

2350.88 2296.07 2193.7 3121.14 12754.65 1354.5

PAT 3058.33 1741.07 3021.43 3905.36 9166.05 2074.92 Balance Sheet

Capital 365.53 525.91 410 315.3 634.88 505.12 Reserves Total 14740.86 13704.08 14261.78 17407.62 65314.32 9918.66 Deposits 241044.27 229761.94 234651.44 249329.8 804116.25 170039.73 Borrowings 13350.08 22399.9 8440.56 19262.37 103011.6 9215.31 Investments 61182.37 67080.18 69676.95 77724.47 285790.06 54403.53 Advances 175035.3 168490.7 169334.63 186601.2 631914.13 119315.3 Fixed & Other Assets 6631.98 8165.44 6386.89 8858.7 40068.55 6013.92 Total Assets 278316.71 274966.45 265051.68 296657.93 1053956.58 195509.44 Financial Ratios

Credit-Deposit (%) 73.43 74.24 72.96 74.34 75.96 69.91 Inv. / Deposit (%) 26.22 28.53 30.24 30.74 36.33 31.55 RONW (%) 21.86 14.16 26.76 26.59 14.8 26.16 Total CAR (%) 14.05 13.01 13.43 14.16 14.25 13.27 % of NNPA 0.34 1.31 1.06 0.53 1.72 0.81 % of GNPA 1.36 2.85 1.52 1.71 3.05 2.2 Return on Assets 1.21 0.7 1.3 1.44 0.88 1.25 Tier I Capital (%) 8.49 8.91 8.54 9.11 9.38 8.19 EPS (annualized) 81.18 31.96 71.99 120.17 140.65 40.14 Book Value 413.27 243.41 305.83 514.78 1038.77 174.37 Other Inc/Tot Inc 42.2 25.5 14.6 19.1 22.5 18.4

Source: IGSL Research

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Research

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Disclaimer

Inventure Growth & Securities Ltd has prepared this Document. The information, analysis and estimates contained herein are based on Inventure’s assessment and have been obtained from sources believed to be reliable. Neither Inventure Growth & Securities Ltd nor any of its employees or associates accepts any liability whatsoever direct or indirect that may arise from the use of information herein and shall not be responsible for its completeness and accuracy. It is not an offer to sell or a solicitation to buy securities. This document is for circulation only

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