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Bank of Baroda: No big surprises - Views on News from Equitymaster

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Bank of Baroda: No big surprises

Feb 4, 2011

Bank of Baroda declared its 3QFY11 results. The bank has reported 43% YoY growth in net interest income while net profits have grown by 28% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 48% YoY in 9mFY11, on the back of 33% YoY growth in advances.
  • Other income grows by a marginal 3% YoY in 3QFY11 but remains flat for the nine month period due to fall in treasury income.
  • Despite yields on overseas assets remaining substantially low, global NIMs move up from 2.9% in 9mFY10 to 3.2% in 9mFY11.
  • Net NPAs move up from 0.3% in 9mFY10 to 0.4% in 9mFY11.
  • Net profit up 37% YoY in 9mFY11; provisions for restructured loans eat into the profits.
  • Capital adequacy ratio comfortable at 12.5% at the end of 9mFY11.

Rs (m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Interest income    41,770 56,661 35.6%    123,445 155,518 26.0%
Interest Expense    25,757 33,738 31.0%  81,499  93,634 14.9%
Net Interest Income    16,013 22,923 43.2%  41,946  61,884 47.5%
NIM (%)       2.9% 3.2%  
Other Income 6,597 6,762 2.5%  19,580  19,747 0.9%
Other Expense 9,959 11,172 12.2%  28,460  31,273 9.9%
Provisions and contingencies 2,425 3,041 25.4% 3,199 7,409 131.6%
Profit before tax    10,226 15,472 51.3%  29,867  42,949 43.8%
Tax 1,899 4,783 151.9% 8,346  13,476 61.5%
Profit after tax / (loss) 8,327 10,689 28.4%  21,521  29,473 36.9%
Net profit margin (%) 19.9% 18.9%   17.4% 19.0%  
No. of shares (m)         364.2  
Book value per share (Rs)*         459.5  
P/BV (x)         1.8  
* (Book value as on 31st December 2010)

What has driven performance in 3QFY11?
  • Re-pricing loans at a faster clip helped BOB sustain margins during the quarter and nine month ended December 2010. With 27% of its advances in overseas markets Bank of Baroda grew its advance book by 33% in 9mFY11. While the overseas book grew at a marginally faster clip, the domestic advances growth also outperformed the sector average. Despite the pressure on overseas interest rates, the bank’s margins (NIMs) improved from 2.9% in 9mFY10 to 3.2% in 9mFY11 due to re-pricing of domestic assets. 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 marginally lower at 34% of total deposits in 9mFY11 (35% in 9mFY10).

    Focus on domestic retail
      9mFY10 % of total 9mFY11 % of total Change
    Advances    1,561,710       2,072,090   32.7%
    Domestic    1,160,000       1,520,390   31.1%
    % of total 74%   73%    
    Agriculture 188,030 12.0%  231,170 15.2% 22.9%
    Retail 223,010 14.3%  296,060 14.3% 32.8%
    SME 202,330 13.0%  252,550 12.2% 24.8%
    Overseas 401,710    551,700   37.3%
    Deposits    2,151,170       2,815,120   30.9%
    Domestic    1,661,590       2,153,780   29.6%
    % of total 77%   77%  
    CASA 580,910 35.0%  739,440 34.3% 27.3%
    Term deposits    1,080,680 65.0%     1,414,340 65.7% 30.9%
    Overseas 489,580    661,340   35.1%

  • BOB grew its fee income by just 8% YoY in 3QFY11. Thus, the fees failed to shield the poor performance of the bank’s trading portfolio in 3QFY11 due to upward movement of interest rates. As a result for the nine month period the other income remained flat.

  • The bank’s cost to income ratio declined from 46% to 38% for the global operations in 9mFY11. For the overseas operations it stood at 19% in 9mFY11.

  • The net NPAs went up marginally from 0.3% of total advances in 9mFY10 to 0.4% in 9mFY11. However, sufficient provision coverage of 85% substantially reduced the provisioning requirement for the bank in 3QFY11. Gross NPAs for domestic operations were higher at 1.6% as against 0.6% for overseas operations in 9mFY11.

  • BOB’s overseas business contributed 25% of the bank’s total business, 16% of profits and 27% of the fee based income in 1HFY11.

  • The bank plans to hire another 4,000 employees in FY12 having already recruited 1,660 employees so far in FY11.

What to expect?
At the current price of Rs 1,039, the stock is valued at 1.2 times our estimated FY13 adjusted book value (ResearchPro subscribers can view latest updates here). The bank has marginally outperformed our broad asset growth estimations. While we draw comfort from the bank’s adequate capital and provisioning cover, the vulnerable other income and incremental slippages are our concerns with regard to the bank. We maintain our positive view on the stock from a long term perspective.

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