Bank of Baroda

Recommendation: Buy
Price target: Rs500
Current market price: Rs393

Treasury gains drive strong PAT

Result highlights

*
For Q3FY2008, Bank of Baroda (BoB) reported a profit after tax (PAT) of Rs501 crore, beating our estimate of Rs402.6 crore and the consensus estimate of Rs378.3 crore. The PAT indicates a growth of 52.3% year on year (yoy) and 53.1% quarter on quarter (qoq) primarily driven by a strong growth in the non-interest income.
*
The net interest income (NII) growth was moderate at 9.8% yoy to Rs997.5 crore. The NII growth was largely due to the continued pressure on the net interest margin (NIM) and a relatively slower credit growth of 23% compared with that of 27.1% during H1FY2008.
*
During the quarter, the deposits grew by 22% yoy to Rs136,900 crore, while the advances rose by 23% yoy to Rs 95,518 crore. With the advances growth outpacing the deposit growth, the credit-deposit (CD) ratio improved to 69.8% for the quarter from 68.7% for the previous quarter and 69.2% for the year-ago period.
*
The non-interest income spiked up 85.2% yoy to Rs618 crore on the back of strong treasury gains, thereby supporting the bottom line. The treasury gains for the quarter came in around Rs194.4 crore, about five times the gain in the year ago period.
*
The operating expenses growth was contained at 7.1% yoy to Rs683 crore, while on quarter-on-quarter (q-o-q) basis it declined by 14.4%. This was largely due to a 8.5% year-on-year (y-o-y) decline in the staff expenses, partially offset by 40% y-o-y jump in the other operating expenses.
*
The asset quality remained healthy with the gross non-performing assets (GNPA) declining by 14.6% yoy to Rs2,040.3 crore, while the net non-performing assets (NNPA) were largely flat yoy at Rs517.2 crore. However, the provisioning coverage declined to 75% for the quarter from 77% for the previous quarter and 78% for the year ago period.
*
The bank remains well capitalised with a capital adequacy ratio (CAR) of 13.5% at the end of December 2007 compared with 12.9% at the end of September 2007 and 12.2% at the end of December 2006.
*
In short term, the proposed initial public offering (IPO) of the UTI Mutual Fund should act as a trigger for BoB, as the bank holds 25% stake in the fund. Recent media reports suggest a valuation of about Rs6,500 crore for the UTI Mutual Fund compared with our valuation of Rs4,000 crore.
*
At the current market price of Rs393 the stock is quoting at 8.2x its FY2009E earnings per share (EPS), 4.3x its pre-provision profit (PPP) and 1.3x FY2009E book value (BV). We maintain our Buy recommendation on the stock with a price target of Rs500.