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Bank of Baroda: Overseas business acquires scale - Views on News from Equitymaster
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Bank of Baroda: Overseas business acquires scale
Jan 28, 2010

Performance summary
  • Interest income grows by 13% YoY in 9mFY10, on the back of 24% YoY growth in advances.
  • Other income grows by 8% YoY backed by growth in treasury income.
  • While domestic NIMs dropped from 3.2% in 9mFY09 to 3.0% in 9mFY10, fall in overseas NIMs to the extent of 0.5% (to 1.5% in 9mFY10) takes a toll on profitability.
  • Net NPAs decline from 0.4% in 3QFY09 to 0.3% in 3QFY10.
  • Capital adequacy ratio comfortable at 14.7% (as per Basel II) at the end of 9mFY10.


Rs (m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Interest income 41,080 41,770 1.7% 109,528 123,445 12.7%
Interest Expense 26,462 25,757 -2.7% 73,001 81,500 11.6%
Net Interest Income 14,618 16,013 9.5% 36,527 41,945 14.8%
NIM (%)       2.9% 2.7%  
Other Income 8,465 6,596 -22.1% 18,090 19,580 8.2%
Other Expense 9,627 9,959 3.4% 25,561 28,461 11.3%
Provisions and contingencies 2,810 2,425 -13.7% 6,574 3,198 -51.4%
Profit before tax 10,646 10,225 -4.0% 22,482 29,866 32.8%
Tax 3,562 1,899 -46.7% 7,737 8,346 7.9%
Profit after tax / (loss) 7,084 8,326 17.5% 14,745 21,520 45.9%
Net profit margin (%) 17.2% 19.9%   13.5% 17.4%  
No. of shares (m)       364.3 364.3  
Book value per share (Rs)*         371.5  
P/BV (x)         1.5  
* (Book value as on 31st December 2009)

What has driven performance in 9mFY10?
  • While not being able to profitably deploy excess liquidity in the domestic markets, Bank of Baroda leveraged its overseas franchises to grow its balance sheet in the third quarter of FY10. The pressure on interest rates, however, took a toll on the bank’s margins (NIMs). Bank of Baroda (BoB) grew its global advances and global deposits by 38% and 53% respectively in 9mFY10. The growth in overseas loan book although higher than the domestic book was not equally profitable due to excessive pressure on yields. The proportion of low cost deposits in the domestic portfolio was 36% of total deposits in 9mFY10. BOB increased its exposure to SME and agricultural assets while cutting down its retail loan book in the last quarter. While the bank hopes to sustain the level of NIM in the range of 2.5% to 3% in FY10, we have conservatively estimated at 2.2% for the full year.

    Overseas book leads growth
      9mFY09 % of total 9mFY10 % of total Change
    Advances 1,264,750   1,561,710   23.5%
    Domestic 973,390   1,160,000   19.2%
    % of total 77%   74%    
    Agriculture 156,550 12.4% 188,030 16.2% 20.1%
    Retail 188,050 14.9% 223,010 14.3% 18.6%
    SME 137,100 10.8% 202,330 13.0% 47.6%
    Overseas 291,360   401,710   37.9%
    Deposits 1,686,160   2,151,170   27.6%
    Domestic 1,365,160   1,661,590   21.7%
    % of total 81%   77%    
    CASA 492,830 38.6% 613,850 36.2% 24.6%
    Term deposits 872,330 63.9% 1,047,740 63.1% 20.1%
    Overseas 321,000   489,580   52.5%

  • Although, BOB seems to have drawn focus on this counter to shield its profits from getting eroded by the lower NIMs and treasury losses a large part of the other income in 9mFY10 were primarily from trading gains. Fee income backed by growth in commissions and forex income grew by 13% to form 11% of total income at the end of 9mFY10. The bank currently has 79% of investments in the HTM basket.

  • The bank’s cost to income ratio was 51% for the domestic operations and 22% for the overseas operations in 9mFY10. Overall cost to income ratio was 46% in 9mFY10.

  • The net NPAs declined from 0.4% of total advances in 9mFY09 to 0.3% in 9mFY10. More importantly, the growth in cash recoveries substantially reduced the provisioning requirement for the bank in 9mFY10. The NPA coverage ratio stood at a comfortable 78% at the end of 9mFY10.

  • BOB’s overseas business contributed 24% of the bank’s total business, 24% of profits and 42% of the fee based income in 9mFY10.

  • BoB is targeting an overall business growth of 25% in FY10, while growing its fee based income by atleast 20% YoY.

What to expect?
At the current price of Rs 551, the stock is valued at 1.0 time our estimated FY12 adjusted book value. The bank has marginally outperformed our broad asset growth and margin estimations so far in FY10. While we draw comfort from the bank’s adequate capital and high provisioning cover, the low fee income proportion is our concerns with regard to the bank. We maintain our positive view on the stock.

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