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Bank of Baroda: Proving its mettle - Views on News from Equitymaster
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Bank of Baroda: Proving its mettle
Feb 4, 2008

Performance summary
  • Interest income grows by 29% YoY in 3QFY08, on the back of 23% YoY growth in advances.

  • Other income grows by a whopping 85% YoY.

  • Net interest margins sustained at 3%.

  • 47% YoY growth in cash recoveries saves NPA blushes.

Rs (m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Interest income 23,344 30,022 28.6% 63,832 84,824 32.9%
Interest Expense 14,262 20,047 40.6% 38,591 55,991 45.1%
Net Interest Income 9,082 9,975 9.8% 25,241 28,833 14.2%
NIM (%)       3.0% 3.0%  
Other Income 3,337 6,180 85.2% 9,329 14,964 60.4%
Other Expense 6,375 6,831 7.2% 17,859 21,656 21.3%
Provisions and contingencies 891 1,569 76.1% 4,490 3,965 -11.7%
Profit before tax 5,153 7,755 50.5% 12,221 18,176 48.7%
Tax 1,861 2,744 47.4% 4,412 6,585 49.3%
Profit after tax / (loss) 3,292 5,011 52.2% 7,809 11,591 48.4%
Net profit margin (%) 14.1% 16.7%   12.2% 13.7%  
No. of shares (m) 365.5 365.5   365.5 365.5  
Book value per share (Rs)*         230.8  
P/BV (x)         1.8  
* (Book value as on 31st March 2007)

What has driven performance in 3QFY08?
  • De-risked portfolio: Despite the fall of interest rates in the overseas markets and slower offtake of credit, Bank of Baroda managed to hedge its portfolio due to its diversified presence. On the back of 25.8% YoY growth in retail credit (20% of total advances), 35% growth in SME segment and 35.7% YoY growth in its agri portfolio, Bank of Baroda registered a 23.0% YoY growth in domestic advances in 9mFY08, marginally outperforming the sector average in terms of domestic growth. The NIMs for the overseas business have been relatively lower than the domestic business over the past few quarters.

    Global presence adds value
      9mFY07 % of total 9mFY08 % of total Change
    Advances 776,610   955,180   23.0%
    Domestic 621,288   755,000   21.5%
    % of total 80%   79%    
    Agriculture 88,961 11.5% 120,720 16.0% 35.7%
    Retail 122,403 15.8% 154,020 20.4% 25.8%
    SME 75,221 9.7% 101,925 13.5% 35.5%
    Deposits 1,122,980   1,369,000   21.9%

  • Costs evening out: The bank’s cost to income ratio dropped from 51% in 3QFY07 to 42% in 3QFY08. This because of the natural attrition of some of its employees. Further, in the next 3 to 4 years, around 4,000 employees of the bank will be retiring, thus considerably lightening its wage burden (as most of these employees are in the high salary bracket). For filling the requisite vacancies, the bank will be recruiting around 300 people each year for the next 3 to 4 years, at relatively lower salary levels as compared to the retirees. We expect this to rationalise the bank's overheads and bring down its cost to income ratio at par with that of its peers in the sector. The cost to income ratio in the overseas operations was at a relatively lower 27%.

  • Growth in other income has been largely attributed to the tripling of treasury income (30% of other income).

  • Cash recoveries buoy bottomline: While Bank of Baroda has witnessed a 14.6% YoY reduction in the absolute value of its gross NPAs over the last 12 months , the net NPAs too have declined from 0.7% of total advances in 3QFY07 to 0.5% in 3QFY08. More importantly, the 47% YoY growth in cash recoveries substantially reduced the provisioning requirement for the bank in 9mFY08.

    In the international operations, gross NPAs are at 0.7% while the net NPAs are zero. While higher recoveries and an adequate coverage ratio of 78% for NPAs dilute some concerns on this front, the NPA level in homes loans (3.5% in FY07) remain a peril. At the end of FY07, 10% of the bank’s corporate credit exposure was categorised in the ‘high risk’ category in terms of ratings.

What to expect?
At the current price of Rs 421, the stock is valued at 1.3 times our estimated FY10 adjusted book value. The bank has marginally outperformed our broad asset growth and margin estimations and we will need to upgrade our forward estimations if the same continues in the forthcoming quarters of this fiscal. Adequate capital, a high provisioning cover, exposure in overseas markets and reasonable consistency in net interest margins makes it a de-risked play in the PSU banking space. We retain our view on the stock.

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