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Bank of Baroda: A consistent performance - Views on News from Equitymaster
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Bank of Baroda: A consistent performance
Jan 31, 2012

Bank of Baroda (BOB) declared its results for the third quarter of financial year 2011-2012 (3QFY12). The bank has reported 35% YoY and a 21% YoY growth in interest income and net profits respectively for the quarter. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 16% YoY in 3QFY12, on the back of 26% YoY growth in advances.
  • Other income grows by a robust 70% YoY in 3QFY12 on an increase in trading gains and profit on forex transactions. It grows by 28% for the nine month period.
  • Despite domestic yields on advances rising, global NIMs were sustained at 3% in 9mFY12 on higher costs of funds.
  • Net NPAs move up from 0.36% in 9mFY11 to 0.51% in 9mFY12.
  • Net profit up 21% YoY in 3QFY12 and 18% YoY in 9mFY12; provisions on advances and higher interest costs eat into profits, but higher other income provides a buffer.
  • Capital adequacy ratio stands at 13.45% at the end of 9mFY12. Its Tier I ratio stands at 9.31%.

Rs (m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Interest income 56,662 76,720 35.4% 155,518 215,552 38.6%
Interest expense 33,739 50,165 48.7% 93,634 140,356 49.9%
Net Interest Income 22,923 26,555 15.8% 61,884 75,196 21.5%
Net interest margin (%)       3.2% 3.0%  
Other Income 6,762 11,493 70.0% 19,747 25,245 27.8%
Other Expense 11,172 11,967 7.1% 31,273 34,647 10.8%
Provisions and contingencies 3,041 8,367 175.2% 7,409 17,111 131.0%
Exceptional item* - 130   - 390  
Profit before tax 15,471 17,584 13.7% 42,949 48,293 12.4%
Tax 4,783 4,686 -2.0% 13,476 13,405 -0.5%
Effective tax rate 30.9% 26.6%   31.4% 27.8%  
Profit after tax/ (loss) 10,689 12,898 20.7% 29,473 34,888 18.4%
Net profit margin (%) 18.9% 16.8%   19.0% 16.2%  
No. of shares (m)         391.5  
Book value per share (Rs)*         617.3  
P/BV (x)         1.2  
* (Book value as on 30th December 2011)
*Charge on taking over the Assets & Liabilities of Memon Co-operative Bank

What has driven performance in 9mFY12?
  • Bank of Baroda (BOB) was able to sustain its net interest margins (NIMs) during 9mFY12. The bank consciously decided to shed its exposure to high cost bulk deposits. With 31% of its advances in overseas markets BOB grew its advance book by 26% YoY in 9mFY12. Even domestically it saw a growth of 18.5%, which came in higher than as per RBI guidance of 18% for non-food credit growth in FY12 (guidance now revised to 16%). The overseas book grew at a faster clip due to rupee depreciation. Since March 2011, domestic credit growth has been in single digits. This is because the bank did not want to aggressively lend in light of the tough macro-environment. Its retail book actually declined by 4% since March '11. BOB's focus remains on maintaining good asset quality.

  • Even with 13 interest rate hikes by the central bank, the bank was able to maintain its NIMs at 3%. The proportion of low cost deposits (CASA) in the domestic portfolio came in lower at 25% of total deposits in 9mFY12 (27% in 9mFY11). CASA growth slowed down to some extent, as customers preferred to opt for term deposits, on account of the higher prevailing interest rates in India. Irrespective, the bank has been able to grow CASA at a sharper click versus the system. Management has made an effort to ensure the growth of the CASA base despite the tough economic environment.

    Overseas and SME drive advance growth
    (Rs m) 9mFY11 % of total 9mFY12 % of total Change
    Advances 2,072,090   2,606,610   25.8%
    Domestic 1,520,390   1,802,340   18.5%
    % of total 73%   69%    
    Retail 296,060 14.3% 310,470 11.9% 4.9%
    Home Loans 118,950 5.7% 137,000 5.3% 15.2%
    SME 252,550 12.2% 321,230 12.3% 27.2%
    Overseas 551,700 26.6% 804,270 30.9% 45.8%
    Deposits 2,815,120   3,492,060   24.0%
    Domestic 2,153,780   2,549,940   18.4%
    % of total 77%   73%    
    CASA 756,320 26.9% 868,360 24.9% 14.8%
    Tem deposits 1,397,460 49.6% 1,681,580 48.2% 20.3%
    Overseas 661,340 23.5% 942,120 27.0% 42.5%
    Credit deposit ratio 73.6%   74.6%    

  • BOB grew its fee income by 19% YoY in 9mFY12. The steady growth in fee income added to a stellar performance of the bank's trading portfolio. The bank was able to post trading gains on the back of selling some of its liquid mutual funds. Profit on forex transactions also saw an increase on account of rupee depreciation. As a result, other income grew by around 28% YoY in 9mFY12 and by 70% in 3QFY12.

  • The bank's cost to income ratio improved to around 34% for the global operations in 9mFY12 from 38% previously. For the overseas operations it stood at 15.1% in 3QFY12, showing the operating efficiency of the bank.

  • The net NPAs went up from 0.36% of total advances in 3QFY11 to 0.51% in 3QFY12. However, the bank maintained sufficient provision coverage of 80.5% in 3QFY12. Gross NPAs for domestic operations were higher at 1.8% as against 0.7% for overseas operations in 3QFY12. The company was able to maintain its asset quality even in a rising interest rate environment due to its diversified loan book. It is also focused on prudently maintaining its provision coverage ratio at high levels. Its NPAs in the large and medium enterprises, housing segment, small scale industries have seen a fall. However, its agri gross NPAs have seen a rise from 3.2% to 4. % in 9mFY12.

  • However the bank saw an increase in its restructured accounts. Loans worth Rs 32 bn were restructured in the 9 month period from April-December 2012. Restructuring in the third quarter was in excess of Rs 20 bn, seeing a huge spike. The financial crisis continues to affect certain borrowers and these accounts were restructured keeping in mind their financial viability. However, this sudden spike does worry us as some accounts in the telecom and infra spaces were restructured. Plus BOB also has exposure to Air India debt, which is still under heavy debate and the final decision is pending.

  • BOB's overseas business contributed 29% of the bank's total business, 20% of the gross profits and 36% of the core fee based income in 9mFY12.

  • The bank reiterated its plan to hire 4,000 employees in FY12. During 9mFY12, BOB opened 327 new branches and it still has 383 licenses left with it to open branches during FY12. However it will do so as and when required.

  • Its capital adequacy ratio stands at 13.45% at the end of 9mFY12. Its Tier I ratio stands at a very comfortable 9.31%. It expects a further capital infusion of Rs 6.75 bn from the government by the end of the fiscal.

What to expect?
At the current price of Rs 753, the stock is valued at 1 times our estimated FY14 adjusted book value. The bank has shown a robust performance despite a tough macro-economic environment, especially on the NII front and even growth in other income was robust. On account of its extensive presence overseas, BOB has greater headroom to absorb higher cost of funds.

The bank has seen a strong growth in its overseas loan book as well as from the small and medium enterprises (SME) space. The robust growth from SMEs has mainly come from the services space, as the manufacturing sector has been affected by the slowdown. The bank has been extremely strategic on this account, as it has observed that these accounts suffer from fewer asset quality issues. The bank has controlled its lending to certain sectors where it feels there may be stress going forward such as real estate, telecom, and electricity boards etc. The huge spike in restructured assets, however, is a concern.

BOB has sufficient headroom on the capital front and a further capital infusion is planned. The bank reiterated its target of growing ahead of the industry average and maintains its NIMs. We continue to maintain our positive view on the stock on account of its reasonable valuations, and the fact that it continues to outperform the sector.

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Feb 20, 2018 02:49 PM


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