BoB return ratios may deteriorate

Bank of Baroda’s (BoB) fund-based exposure details reveal diversified growth in line with overall domestic credit growth across industries. Fund based exposure in iron and steel (6.4%),textiles (4.7%),gems and jewelry (0.5%) and infrastructure (14%,down 120bp y-o-y) remains stable. Exposure to power segment remained stable in absolute terms at R14,300 crore (7% of total exposure),of which 6,800 crore is for transmission and distribution. Addition of 10 new SME loan factories and 8 specialised SME branches,and focused strategies have ensured continuance of strong growth momentum in SME loans (25%+ y-o-y).

Asset quality deteriorates,but better than peers. Net slippages have increased from 0.7% a year ago to 1.1% (highest since FY04). Large ticket government entity related restructuring led to sharp increase in restructured loans to 6.5% of loans v/s 4.2% a year ago. The outstanding restructured loans should also be viewed in the context of strong loan CAGR of 28% over FY10-12. In percentage terms,GNPAs have increased across segments (except Industry) in FY12.

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Led by significant rupee depreciation,BoB reported foreign currency translation reserve of R697 crore (265bp of net worth),amounting to R16.9/share. We have adjusted this while calculating the book value.

Discount rate assumption for pension liability up to 8.75% v/s 8.5% in FY11. High maturity mismatch – 66% of deposits and 43% of loans maturing in FY13. Commercial Real Estate exposure declined to 2% of loans v/s 2.7% a year ago. Wholesale banking sanctions declined by 22% in FY12. Core tier-I ratio increased to 10.1% v/s 9.1% a year ago. BoB continues to deliver strong business growth and margins. However,fee income growth remains volatile.

The bank’s overall restructured loans are now in line with peers at 6.5% of loan book. Domestic restructured loans stand at ~7.5% of the loan book (5.2% excluding Air India and SEBs). While valuations are reasonable,they need to be seen in the context of expected deterioration in RoA/RoE in FY13/FY14. We maintain Neutral.

Motilal oswal