4QFY18 Result Update Institutional Equities Bank of Baroda Reuters: BOB.BO; Bloomberg: BOB IN Stress Peaks, Underlying Business Transforming; Upgrade To Buy Bank of Baroda (BoB) reported its 4QFY18 results with the key strategic pointers being: (1) BoB took significant cognizance of the RBI February Circular and recognised a significant chunk of its stress pipeline consisting of various restructuring dispensations as NPA. BoB guidance that credit costs would be contained below 100 bps in FY19 seems largely credible. (2) BoB s retail strategy is bearing significant fruit with 42% YoY growth in retail loans with incremental aspects of strategy waiting to be executed. (3) Operating expenses saw a one-off depreciation charge but technology initiatives augur well from an opex control perspective. (Kindly see analyst meet highlights). Per se, on the results front, BoB posted NII growth of 12% YoY to Rs40bn, PPOP de-growth of 12% YoY to Rs26.6bn and Net Loss of Rs31bn. We have revised our estimates for FY19/FY20 and upgraded to BUY rating, revising our target price to Rs168 (from Rs146 earlier), and valuing the stock at 0.8x FY20E P/BV (1.25x FY20E P/ABV). Our rating upgrade is driven by (1) stock price decline, (2) upward revision of earning estimates, driven by (i) higher loan growth, (ii) superior fee income traction, (iii) controlled opex. BoB guidance that credit costs would be contained below 100 bps in FY19 seems largely credible: BoB took significant cognizance of the RBI February Circular and recognised a significant chunk of its stress pipeline consisting of various restructuring dispensations as NPA. Of the Rs 117.65bn worth of total fresh slippages in 4QFY18, Rs 89.6bn (or 76% of total) were from the watchlist, of which Rs 42.74bn (or 47% of watchlist slippages) were from the standard restructured book on account of RBI s 12 th February Circular overhauling modus operandi for stressed asset resolution. Consequently, standard restructured book has declined by 47% QoQ to Rs 47.47bn as of 4QFY18. BoB also has Rs 27.41bn of Flexible Restructuring (presumably standard and non-overlapping) exposure. The comprehensive watchlist including SMA2 and stressed SMA1 account in worth Rs 100.39bn or 2.2% of 4QFY18 gross advances. Provision cover on NCLT List 1 (Rs 71.58bn) and List 2 (Rs 38.3bn) is 55.2% each. Most of the relatively moderate Divergence in FY17-end GNPA amounting to Rs 29.19bn (0.7% of FY17 Gross Advances) was closed by 1HFY18. All things considered, BoB s guidance for credit costs being contained within 100 bps in FY19 seems largely credible. BoB s retail strategy is bearing significant fruit with 42% YoY growth in retail loans with incremental aspects of strategy waiting to be executed: BoB s now 2-year old retail strategy is bearing significant fruit with 42% YoY domestic retail credit growth to 23% domestic credit share in 4QFY18 (20% in 4QFY17). While this was aided somewhat by low Demonetisation-impacted base, management opines BoB needs to grow retail loans at a 25% ballpark to achieve diversification goals. Retail asset initiatives that would see incremental focus going forward include (1) Baroda Radiance Program, focused on managing wealth for HNIs (2) Credit Cards, where it planned the active card count be doubled over FY19 to 245,000. Global gross loan growth stood at 13% YoY to Rs4607bn with international advances share declining 340bps YoY to 24% (in Rs 1094.7bn). Within retail credit, home loans grew 48% YoY to 54% share of retail loans. Corporate, MSME and Agri credit grew 17%, 7% and 5% YoY, respectively with 47%, 15% and 14% share respectively in domestic credit. Management guided for a 15% plus loan CAGR for domestic credit over the next 2 years. Operating expenses saw a one-off depreciation charge but technology initiatives augur well from an opex control perspective: Depreciation expenses jumped 275% YoY to Rs 4.95bn contributing to a 19.4% YoY increase in total operating expenses to Rs 30.33bn. This was on account of taking delayed cognizance of a change in accounting policy with respective to revaluation of assets. Otherwise, salary cost rise was relatively moderate at 9.1% YoY to Rs 11.52bn. Generally, BoB management is conscious of pushing technology initiatives and, in this regard, two Centres of Excellence in: (1) IT, in partnership with IBM and (2) Analytics, in partnership with Accenture have been launched. Tab banking has been moved from pilot phase to being launched across all branches in the country. Baroda Diginext is a state-of-the-art cash management platform that filled up a white space in corporate servicing and is seeing good traction from a perspective of deepening corporate relationships. All of these augur well for opex control as well as revenue generation from an ultra-long term perspective. Valuation and outlook We have revised our NII estimates by 0.6%/3.1% for FY19/FY20, our PPOP estimates by 3.5%/13.8% and our PAT estimates by 2.0%/16.3%, respectively. We have upgraded our rating on BoB to Buy (from 28 May 2018 BUY Sector: Banking CMP: Rs141 Target Price: Rs168 Upside: 19% Shivaji Thapliyal Research Analyst shivaji.thapliyal@nirmalbang.com +91-22-6273 8068 Shreesh Chandra Research Associate shreesh.chandra@nirmalbang.com +91-22-6273 8028 Key Data Current Shares O/S (mn) 2,645.5 Mkt Cap (Rsbn/US$bn) 373.8/5.5 52 Wk H / L (Rs) 207125 Daily Vol. (3M NSE Avg.) 16,419,930 Price Performance (%) 1 M 6 M 1 Yr Bank of Baroda (1.3) (18.0) (21.3) Nifty Index (0.8) 2.3 10.5 Source: Bloomberg I Sell earlier), valuing the stock at 0.8x FY20E P/BV and revised our target price to Rs168 (from Rs146 earlier). Y/E March (Rsmn) 4QFY18 4QFY17 3QFY18 YoY (%) QoQ (%) Interest income 110,393 108,752 113,032 1.5 (2.3) Interest expenses 70,370 72,933 69,092 (3.5) 1.8 Net interest income 40,023 35,819 43,940 11.7 (8.9) NIM (%) 2.5 2.3 2.8 22bps (33bps) Non-interest income 16,959 19,770 16,730 (14.2) 1.4 Operating income 56,982 55,589 60,671 2.5 (6.1) Staff costs 12,685 12,220 11,104 3.8 14.2 Other operating expenses 17,642 13,170 13,065 34.0 35.0 Total operating expenses 30,327 25,390 24,170 19.4 25.5 Cost-to-income (%) 53.2 45.7 39.8 755bps 1,338bps Pre-provision profit 26,655 30,199 36,501 (11.7) (27.0) Provisions 66,724 26,230 34,265 154.4 94.7 PBT (40,069) 3,969 2,236 (1,109.5) (1,892.0) Tax (9,046) 2,420 1,118 (473.8) (908.9) -Effective tax rate 22.6 61.0 50.0 (3,840 bps) (2,743bps) PAT (31,023) 1,549 1,118 (2,102.8) (2,875.4) EPS (Rs) (11.7) 0.7 0.5 (1,845.0) (2,518.2) BV (Rs) 163.6 174.4 175.9 (6.2) (7.0)
Other key aspects from the company release 1. Granularity of Deposits: Retail Term Deposits as of FY18 consist of 82% of Domestic Term Deposits. CASA and Retail Term Deposits comprise 90% of Total Domestic Deposits. 2. Improved sourcing of Retail Loans: Post 1st April 2016, proportion of customers with CIBIL score greater than 725 has increased from 41% to 63%. 3. Improved rating profile of corporate customers: External rating of customers of ticket size greater than Rs 50mn has improved with proportion of those rated A and above rising from 39% in FY17 to 52% in FY18. Those rated Below BBB has moved lower from 22% to 20%. Unrated borrowers proportion has plummeted from 23% to 13%. 4. Improved capital efficiency on corporate book: Ratio of RWA to corporate assets has fallen from 62% in FY17 to 49% in FY18. 5. Sensitivity of investment book to interest rates is now low: Modified duration of AFS book stood at 1.44 as of FY18-end. (There were no MTM losses during 4QFY18 and hence, no need to avail RBI dispensation to spread such losses.) 6. Positive one-off in the tax expense line: Tax provisions writeback of Rs 9.05bn was taking during 4QFY18. 7. Capital infusion from Government of India (GOI) completed during the quarter: Equity capital infusion by GOI of Rs 53.75bn was completed during 4QFY18. Key analyst meet highlights The management stated that the bank will gradually roll out a wealth management program for HNIs Baroda Radiance Programme. The bank is also ramping up its credit cards division and expects the number of active credit cards to jump significantly going forward. The management has identified key target markets for corporate clients, with the objective of deepening corporate relationships. The cash management solutions (Baroda Diginet) is seeing good traction on the ground. Yield on advances for the quarter eased 11bps QoQ to 8.68% due to higher slippages and lower number of working days. The bank has a relatively low duration AFS portfolio at the beginning of FY19 which has helped the bank to stay ahead of the steepening yield curve The management stated that the share of wholesle business in the international deposit business is set to reduce. The bank s placement business and buyers credit business is on the decline. The management has tried to maintain the NNPA ratio at ~5% The management foresees benefits from sale of non-core assets like asset management, and investments in other financial companies The management stated that the bulk of divergence as noted by the RBI was addressed by 2QFY18. The management expressed the need for a 25% growth in the retail lending book for a balanced portfolio. The management stated that RoE should move to double digits in FY19 The management stated that focus on customers contributing to 80% of total business will help augment fee income The bank has made tab banking available to all branches across the country. This reduces from a few days to a few minutes. The bank has also strengthened its digital banking channels and its DSA channel. The bank has also identifed UAE, Kenya and Uganda as key centers for NRI banking The management stated that the bank has tied up with Tata Motors for fleet financing. The bank has also tied up with Uber. 2 Bank of Baroda
The bank is strengthening its lending to supply chain businesses, its cash management offering, and TREDs. The management stated that it provided over and above IRCA norms. To begin with, it has provided 20% as against the 15% requirement for non standard loans. Even then the non-funded exposure of the bank had not devolved, the bank had consistently provided for against certain non-funded exposures (applying a 50% CCF factor). All auto loans delinquent over 180 days have been provided for fully. Similarly, education loans delinquent over 180 days have been provided for fully. The PCR on retail loans is ~75-80% The management guided for 60-90bps of credit cost for FY19 The management stated that under IND-AS, the provisons on stressed assets will be made when the accounts fall into the SMA1 and SMA2 category. The major divergence in provisions would be on provisions for Standard Assets, and should rectify within 3 years of implementation. As the provisions on standard assest under IND-AS would be on the basis of credit ratings, the management expects the divergence in ratings from various credit rating entities to come off. The management stated that the toal claim on NCLT accounts includes 30-35% interest over and above the outstanding amounts. The management stated that there are no delinquancies on corporate loan accounts originated post 2015. Of the total power sector exposure (excuding SEBs) of Rs188.63bn, outstanding NPAs stood at ~Rs40bn, while Rs20.45bn currently stands under the watchlist. The management stated that the worst of exposures to power projects have been identified. Slippage from large corporate accounts, retail, and agriculture stood at Rs82bn, Rs5.3bn and Rs7.15bn respectively. Slippage from international assest stood at Rs13.6bn. The bank had 9 accounts under the 5/25 scheme amounting to Rs27.41bn The SMA2 book has been declining QoQ The management stated that growth in corporate business is largely from new acquisitions, with focus on pharma, auto and other sectors. The management stated that the bank would be able to sustain a 15% growth in fee income going forward. The management expressed the need to accrue incremental term deposits. The management stated that going forward cost of funds would go up due to higher cost of term deposits, while net earning assets will also improve on account of increased recoveries, and hence NIM levels will be maintained. Interest reversals for the year were Rs5.87bn, while that for the quarter were Rs1.69bn 3 Bank of Baroda
May-08 Oct-08 Feb-09 Jul-09 Nov-09 Mar-10 Aug-10 Dec-10 May-11 Sep-11 Feb-12 Jun-12 Oct-12 Mar-13 Jul-13 Dec-13 Apr-14 Sep-14 Jan-15 Jun-15 Oct-15 Feb-16 Jul-16 Nov-16 Apr-17 Aug-17 Jan-18 May-18 Institutional Equities Exhibit 1: Financial summary Y/E March (Rsmn) FY16 FY17 FY18 FY19E FY20E Net interest income 127,398 135,134 155,220 177,089 202,337 Pre-provision profit 88,156 109,750 120,060 137,073 161,260 PAT (53,955) 13,831 (24,310) 56,420 74,804 EPS (Rs) (23.4) 6.0 (9.2) 20.0 26.5 BV (Rs) 156.1 159.0 150.2 186.2 209.1 P/E (x) (6.1) 23.6 (15.4) 7.1 5.3 P/BV (x) 0.9 0.9 0.9 0.8 0.7 Gross NPAs (%) 10.0 10.5 12.3 11.7 11.4 Net NPAs (%) 5.1 4.7 5.5 4.9 3.9 RoA (%) (0.8) 0.2 (0.3) 0.7 0.8 RoE (%) (13.5) 3.4 (5.8) 11.3 12.6 Exhibit 2: Actual performance versus our estimates (Rsmn) 4QFY18 4QFY17 3QFY18 YoY (%) QoQ (%) 4QFY18E Devi. (%) Net interest income 40,023 35,819 43,940 12 (9) 43,834 (9) Pre-provision profit 26,655 30,199 36,501 (12) (27) 32,224 (17) PAT (31,023) 1,549 1,118 - - 3,173 - Exhibit 3: Change in our estimates Revised estimate Earlier estimate % Revision FY19E FY20E FY19E FY20E FY19E FY20E Net interest income (Rsmn) 177,089 202,337 176,064 196,287 0.6 3.1 NIM (%) 2.5 2.4 2.4 2.4 6bps - Operating profit (Rsmn) 137,073 161,260 132,428 141,722 3.5 13.8 Profit after tax (Rsmn) 56,420 74,804 55,324 64,341 2.0 16.3 EPS (Rs) 20.0 26.5 21.6 25.1 (7.2) 5.8 ABV (Rs) 101.8 134.3 101.2 112.6 0.6 19.2 Exhibit 4: One-year forward P/ABV (x) 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 - Source: Bloomberg, Nirmal Bang Institutional Equities Research P/BVPS Mean +1 SD -1 SD 4 Bank of Baroda
Financials Exhibit 5: Income statement Y/E March (Rsmn) FY16 FY17 FY18 FY19E FY20E Interest income 440,612 421,999 436,490 489,872 561,979 Interest expenses 313,214 286,865 281,270 312,783 359,642 Net interest income 127,398 135,134 155,220 177,089 202,337 Fee income 38,178 40,621 47,790 52,227 61,454 Other income 11,811 26,960 18,780 17,941 24,246 Net revenues 177,387 202,714 221,790 247,257 288,037 Operating expenses 89,231 92,964 101,730 110,184 126,778 -Employee expenses 49,780 46,378 46,070 53,416 62,763 -Other expenses 39,451 46,586 55,660 56,768 64,015 Operating profit 88,156 109,750 120,060 137,073 161,260 Provision 155,136 85,024 147,960 61,846 61,521 -Loan loss provision 137,556 80,136 142,186 56,836 56,405 -Investment depreciation 3,414 293 7,680 - - -Other provision 14,226 (3,105) 1,850 500 500 PBT (66,980) 24,727 (27,900) 75,227 99,738 Tax (13,025) 10,896 (3,590) 18,807 24,935 PAT (53,955) 13,831 (24,310) 56,420 74,804 Exhibit 7: Balance sheet Y/E March (Rsmn) FY16 FY17 FY18 FY19E FY20E Equity capital 4,621 4,621 5,304 5,637 5,637 Reserves & surplus 397,369 398,412 428,644 554,824 619,441 Shareholder's funds 401,990 403,033 433,948 560,461 625,078 Deposits 5,740,379 6,016,752 5,913,148 6,634,439 7,478,350 -Current deposits 346,291 425,193 460,620 464,411 523,485 -Saving deposits 1,167,054 1,509,765 1,657,170 1,658,610 1,869,588 -Term deposit 4,227,034 4,081,794 3,795,358 4,511,419 5,085,278 Borrowings 334,717 306,114 625,720 1,155,651 1,235,641 Other liabilities 236,679 222,855 227,182 193,931 211,400 Total liabilities 6,713,765 6,948,753 7,199,998 8,544,482 9,550,469 Cash/equivalent 1,339,003 1,504,699 928,974 1,707,056 1,847,467 Advances 3,837,702 3,832,592 4,274,318 4,808,608 5,433,727 Investments 1,204,505 1,296,305 1,631,845 1,630,156 1,833,563 Fixed assets 62,538 57,584 53,674 56,358 59,175 Other assets 270,017 257,574 311,186 342,305 376,536 Total assets 6,713,765 6,948,754 7,199,998 8,544,482 9,550,469 Exhibit 6: Key ratios Y/E March FY16 FY17 FY18 FY19E FY20E Growth (%) NII growth (3.4) 6.1 14.9 14.1 14.3 Pre-provision profit growth (11.1) 24.5 9.4 14.2 17.6 PAT growth (258.8) (125.6) (275.8) (332.1) 32.6 Business (%) Deposit growth (7.0) 4.8 (1.7) 12.2 12.7 Advance growth (10.3) (0.1) 11.5 12.5 13.0 Business growth (8.4) 2.8 3.4 12.3 12.8 CD 66.9 63.7 72.3 72.5 72.7 CASA 26.4 32.2 35.8 32.0 32.0 Operating efficiency (%) Cost-to-income 50.3 45.9 45.9 44.6 44.0 Cost-to-assets 1.3 1.4 1.4 1.4 1.4 Productivity (Rsmn) Business per branch 1,762.0 1,797.0 1,863.4 1,950.4 2,060.3 Business per employee 184.1 187.9 183.0 195.0 206.0 Profit per branch (9.9) 2.5 (4.4) 9.6 11.9 Profit per employee (1.0) 0.3 (0.4) 1.0 1.2 Spreads (%) Yield on advances 7.3 7.2 7.2 7.3 7.4 Yield on investments 8.8 8.5 7.1 7.2 7.2 Cost of deposits 4.9 4.6 4.4 4.4 4.3 Yield on assets 6.9 6.7 6.7 6.8 6.8 Cost of funds 4.8 4.5 4.2 4.2 4.3 NIMs 2.0 2.2 2.4 2.5 2.4 Capital adequacy (%) Tier I 10.8 9.9 10.5 12.0 11.5 Tier II 2.4 2.3 1.7 1.5 1.2 Total CAR 13.2 12.2 12.1 13.5 12.7 Asset Quality (%) Gross NPAs 10.0 10.5 12.3 11.7 11.4 Net NPAs 5.1 4.7 5.5 4.9 3.9 Provision coverage 52.1 57.7 58.4 60.8 65.9 Slippage 6.9 3.5 6.0 2.5 1.7 Credit-cost 3.4 2.1 3.5 1.3 1.1 Return (%) RoE (13.5) 3.4 (5.8) 11.3 12.6 RoA (0.8) 0.2 (0.3) 0.7 0.8 RoRWA (1.4) 0.3 (0.6) 1.3 1.5 Per share EPS (23.4) 6.0 (9.2) 20.0 26.5 BV 156.1 159.0 150.2 186.2 209.1 ABV 72.1 80.7 61.6 101.8 134.3 Valuation P/E (6.1) 23.6 (15.4) 7.1 5.3 P/BV 0.9 0.9 0.9 0.8 0.7 P/ABV 2.0 1.8 2.3 1.4 1.1 5 Bank of Baroda
Apr-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Institutional Equities Rating track Date Rating Market price (Rs) Target price (Rs) 30 July 2014 Accumulate 867 865 8 October 2014 Accumulate 858 865 10 November 2014 Accumulate 970 1,020 8 January 2015 Accumulate 1,069 1,020 2 February 2015 Accumulate 192 200* 12 May 2015 Accumulate 170 190 31 July 2015 Accumulate 167 186 9 November 2015 Accumulate 169 180 15 February 2016 Accumulate 114 110 16 May 2016 Sell 155 130 12 August 2016 Sell 146 125 15 November 2016 Sell 161 135 13 February 2017 Sell 188 130 14 February 2017 Sell 168 140 19 May 2017 Sell 188 140 14 August 2017 Sell 143 132 17 November 2017 Sell 182 152 12 February 2018 Sell 156 146 28 May 2018 Buy 141 168 *Target price arrived at post 1:5 stock split Rating track graph 240 220 200 180 160 140 120 100 Not Covered Covered 6 Bank of Baroda
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