LKP has maintained hold rating on Bank Of Baroda (BoB) with a target of Rs 1086 in its April 08, 2011 research report.
Bank Of Baroda (BoB) has some key advantages which would counterbalance the moderation of credit flow and rising rates such as (1) a low CD ratio enables scaling by ~300 bps (2) robust liability franchise to compensate the rising rate curve (3) Operating leverage to enable earnings momentum in FY12, (4) capital infusion to dispose of concerns on maturing growth rates. We believe BoB presents itself as a logical candidate within the public banking space.
Operating income and PAT is likely to be driven by NII growth of 25% and 27% CAGR over FY10-13E. A strong liability franchise, low cost deposit base has resulted in cost of deposits of 4.5% in 9MFY11 (5% in FY13E). NIMs are likely to increase to 2.8% by FY13. A 100% CBS of the domestic branches has enabled BoB improve branch productivity and launch technology dependent products (cash management services, internet based platform for individuals in particular non-resident Indians). Fee income has lagged growth in core business income; we expect the above initiatives would facilitate higher growth of non interest income. Opex ratios have improved over the past 5 years from 2% in FY07 to 1.5% in FY11. Despite additional branches and employee addition over the next 2 years we expect efficiencies to maintain operating leverage and C/I ratios.
We expect the bank to post RoA of 1.3% over FY12E and FY13E. The capital infusion is likely to suppress RoEs from 23.7% in FY11E to 22% in FY12 and FY13. This is likely to distort RoE comparisons between peers. Currently, BoB trades at a P/ABV of 1.6x FY12 on our ABV of Rs 588.8 and 1.3x on FY13 ABV of Rs 721.9 per share. We have valued BoB at 1.5x P/ABV on our FY13E ABV which translates to a target price of Rs 1,086 per share.Hold, LKP Research Report.
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