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Bank of Baroda: Asset quality hits a hurdle
Feb 6, 2013

Bank of Baroda (BOB) declared its results for the third quarter of financial year 2012-2013 (3QFY13). The bank has reported 15% YoY growth in interest income and a 22% YoY fall net profits for the quarter. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 15% YoY in 3QFY13, on the back of 15% YoY growth in advances.
  • Other income grows by a falls by 27% YoY in 3QFY13 on a decrease in trading gains and lower profits on forex transactions. Core fee income was also flat. Other income fell by 3% during the nine month period.
  • Domestic yields on advances came off, while costs increased, thus global NIMs came in lower at 2.7% in 9mFY13.
  • Net NPAs move up sharply from 0.51% in 9mFY12 to 1.12% in 9mFY13.
  • Net profit down 22% YoY in 3QFY13 and down 1% YoY in 9mFY13; provisions on advances, lower other income and Net Interest Income ate into profits.
  • Capital adequacy ratio stands at 12.66% at the end of 9mFY13. Its Tier I ratio stands at 9.33%.

Standalone financial performance
Rs (m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Interest income 76,720 88,449 15.3% 215,552 261,251 21.2%
Interest expense 50,165 60,040 19.7% 140,356 176,238 25.6%
Net Interest Income 26,555 28,409 7.0% 75,196 85,013 13.1%
Net interest margin (%)       3.0% 2.7%  
Other Income 11,493 8,406 -26.9% 25,245 24,397 -3.4%
Other Expense 11,967 14,255 19.1% 34,647 40,492 16.9%
Provisions and contingencies 8,367 10,293 23.0% 17,111 25,695 50.2%
Exceptional item* 130 124 -4.3% 390 373 -4.3%
Profit before tax 17,585 12,142 -30.9% 48,293 42,849 -11.3%
Tax 4,686 2,026 -56.8% 13,405 8,330 -37.9%
Effective tax rate 26.6% 16.7%   27.8% 19.4%  
Profit after tax/ (loss) 12,899 10,116 -21.6% 34,888 34,519 -1.1%
Net profit margin (%) 16.8% 11.4%   16.2% 13.2%  
No. of shares (m)         411.1  
Book value per share (Rs)*         733.8  
P/BV (x)         1.1  
*Only domestic CASA has been included here

What has driven performance in 9mFY13?
  • Bank of Baroda (BOB) saw a reduction in its global net interest margins (NIMs) during 9mFY13. The bank consciously decided to shed its exposure to high cost bulk deposits and plans to bring this down to 10% of advances by the end of FY13. With 33% of its advances in overseas markets BOB grew its advance book by 15% YoY in 9mFY13. Domestically it saw a growth of 11.6%, which came in lower than the sector average. The bank is consciously going slow on the domestic advance book and seeing FY13 growth in the similar 15-16% range for the overall book. The overseas book grew at a faster clip due to rupee depreciation. Since March 2012, domestic credit growth has been flat. This is because the bank did not want to aggressively lend in light of the tough macro-environment. Its retail book actually declined by 1% since March '12. BOB's focus remains on improving asset quality.

  • The bank was able to sustain its NIMs at 2.7% despite lower yields. Yields are expected to decline further as the bank has cut its base rate by 25 basis points post the repo rate reduction by the RBI. The proportion of low cost deposits (CASA) in the domestic portfolio came in lower at 32% of domestic deposits in 9mFY13 (34% in 9mFY12). CASA growth slowed down to some extent, however the bank doesn't face any liquidity crisis as its liability portion has been growing appreciably.

    Overseas and SME drive advance growth
    (Rs m) 9mFY12 % of total 9mFY13 % of total Change
    Advances 2,606,610   2,993,180   14.8%
    Domestic 1,802,340   2,012,080   11.6%
    % of total 69%   67%    
    Retail 310,470 11.9% 353,920 11.8% 14.0%
    Home Loans 137,000 5.3% 152,050 5.1% 11.0%
    SME 321,230 12.3% 390,830 13.1% 21.7%
    Overseas 804,270 30.9% 981,100 32.8% 22.0%
    Deposits 3,492,060   4,147,330   18.8%
    Domestic 2,549,940   2,953,880   15.8%
    % of total 73%   71%    
    CASA* 868,360 24.9% 951,880 23.0% 9.6%
    Tem deposits 1,601,710 45.9% 1,874,510 45.2% 17.0%
    Overseas 942,120 27.0% 1,193,460 28.8% 26.7%
    Credit deposit ratio 74.6%   72.2%    

  • BOB's other income was flat in 9mFY13 and was down 27% in 3QFY13. In 3QFY13 core fee income was flat. Last year the bank saw trading gains on the selling of some of its money market mutual funds, however this was absent this year and trading gains were down 65% YoY during the quarter. Profit on forex transactions also saw a 25% YoY decrease.

  • The bank's cost to income ratio came in higher at around 37% for the global operations in 9mFY13 from 34% previously. For the overseas operations it stood at 17.6% in 9mFY13, showing the operating efficiency of the bank.

  • The net NPAs went up from 0.51% of total advances in 3QFY12 to 1.12% in 3QFY13. However, the bank maintained sufficient provision coverage of 71% in 3QFY13. Gross NPAs for the bank were higher at 2.41% in 3QFY13 as against 1.48% earlier. For overseas operations in 3QFY13 gross NPAs came in at 0.73%. The company is also focused on prudently maintaining its provision coverage ratio at high levels. Its NPAs in the agri, large and medium enterprises, small scale industries have seen an increase in line with what has been happening in the external environment. Only retail NPAs have been contained. Fresh slippages came in at Rs 45 bn during the 9 month period, compared to Rs 26 bn during 1HFY13.

  • However the bank saw an increase in its restructured accounts. Loans worth Rs 33 bn were restructured in the 9 month period from April-December 2012. Restructuring in the third quarter was around Rs 16 bn, seeing a huge spike versus the Rs 9.3 bn restructured in the September quarter. The external environment continues to affect certain borrowers and these accounts were restructured keeping in mind their financial viability. Restructured assets contribute 6% of the overall book, however are not concentrated in any specific sector.

  • BOB's overseas business contributed 30% of the bank's total business, 24% of the gross profits and 38% of the core fee based income in 9mFY13.

  • The bank plans to hire a total of 3,400 employees in FY13. During 9mFY13, BOB hired 2,700 employees opened 231 new branches and it plans to open 365 new branches in the rest of FY13. Around 33% of the bank's network in 9mFY13 was situated in rural areas.

  • Its capital adequacy ratio stands at 12.66% at the end of 9mFY13. Its Tier I ratio stands at a comfortable 9.33%. It expects a further capital infusion of Rs 8.5 bn from the government by the end of the fiscal.

  • The bank appointed Mr SS Mundra as the Chairman and MD of the Bank for a period of 1.5 years till July 2014. He was previously executive director of Union Bank of India but had a previous stint at Bank of Baroda, where he joined as an officer in 1977 and served until 2008 as general manager in charge of European operations.

What to expect?
At the current price of Rs 795.8, the stock is valued at 1 time our estimated FY15 adjusted book value. The bank has shown a weak performance on account of the tough macro-economic environment. Even on the NII front and the show in terms of other income was disappointing. On account of its extensive presence overseas, BOB has greater headroom to absorb higher cost of funds. However the yields are now falling and the bank is facing pressure on the net interest margin front. Although the spike in NPAs is a concern, the bank to fare better on asset quality compared to its PSU banking peers. BOB intends to slow growth and focus on quality, which we believe will hold the bank in good stead.

Although most of the large chunky accounts have been taken care of now, the future restructuring pipeline of Rs 20-25 bn still exists. However, greater provisioning on these bad accounts dampened profit growth for the 9 months period. Plus, the bank has sufficient headroom on the capital front and a further capital infusion is planned. We continue to maintain our positive view on the stock on account of its reasonable valuations, and reiterate a Hold on the stock.

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