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Bank of baroda – High Profits, Modest Quality

July 27, 2009

While BOB’s 1QFY10 profits were up 85% YoY, well ahead of our 48% expectation, they did disappoint. The primary drivers of the beat were trading gains (pretty common in the quarter) and equity/offshore portfolio write-back (less common in the quarter). The
profit camouflages core P&L pain, whereas a simple reading of the results does
not. The BS does feel a bit of strain too, but did a little better than expectations.

Margins for the sector have suffered a little ahead of expectations. BOB’s are down almost 32bps YoY (48 bps QoQ) and it appears to be among those that have suffered most. Fee incomes have also been relatively wobbly, culminating in pre-provisioning operating profits falling 24% QoQ (up only 7% YoY). This is disappointing, and while management expects a reversal in the rest of the year, it will likely be of modest means relative to the quarters hit.

With management suggesting a relatively cautious outlook, the stock only looking moderately attractive on valuation, and no real big directional upside/downside.

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