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Bank of Baroda: Lower provisions aid 3Q profits
Feb 6, 2014

Bank of Baroda (BOB) declared its results for the third quarter of 2013-2014 (3QFY14). The bank has reported 7.6% YoY growth in net interest income and a 3.6% increase in net profits for the quarter. For 9mFY14, the profits have declined by 2% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 7.6% YoY in 3QFY14, on the back of 17.7% YoY growth in advances.
  • Other income grows by decent 10.9% YoY in 3QFY14.
  • Net interest margins (NIMs) at 3% during 3QFY14 remained almost stable.
  • Operating costs spike up by 25.7% YoY during 3QFY14. Hence, the cost-income ratio stands at higher levels of 45%.
  • Net NPAs move up sharply from 1.12% in 3QFY13 to 1.88% in 3QFY14, gross NPAs at 3.32%.
  • Net profit moves up marginally by 3.6% YoY in 3QFY14 due to lower provisions. However, the bank has reported poor interest income performance and increased operating expenses for the quarter.
  • Capital adequacy ratio stands at 12.01% at the end of 3QFY14.

Standalone financial performance snapshot
Rs (m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Interest income 88,449 96,907 9.6% 261,251 286,511 9.7%
Interest expense 60,040 66,336 10.5% 176,238 198,101 12.4%
Net Interest Income 28,409 30,571 7.6% 85,013 88,410 4.0%
Net interest margin (%)       3.1% 3.0%  
Other Income 8,406 9,321 10.9% 24,397 31,365 28.6%
Other Expense 14,255 17,917 25.7% 40,492 52,038 28.5%
Provisions and contingencies 10,293 7,619 -26.0% 25,695 26,406 2.8%
Exceptional item* 124 156 25.0% 373 467 25.0%
Profit before tax 12,142 14,201 17.0% 42,849 40,865 -4.6%
Tax 2,026 3,722 83.7% 8,330 7,027 -15.7%
Effective tax rate 16.7% 26.2%   19.4% 17.2%  
Profit after tax/ (loss) 10,116 10,478 3.6% 34,519 33,838 -2.0%
Net profit margin (%) 11.4% 10.8%   13.2% 11.8%  
No. of shares (m)         422.5  
Book value per share (Rs)*         843.8  
P/BV (x)         0.6  
* (Book value as on 31st December 2013)
*Charge on taking over the Assets & Liabilities of Memon Co-operative Bank

What has driven performance in 3QFY14?
  • The third quarter earnings of FY14 proved to be benign for BoB primarily supported by lower provisions during the quarter. The3.6% YoY profit growth came in despite increased overheads, higher tax provision and muted NII growth during 3QFY14. However, the asset quality issues persist with the bank reporting higher non-performing loans and fall in provision coverage.
  • The bank's business growth remains buoyant largely supported by oversea operations. While the overseas deposits grew by whopping 72.8% YoY, the advances from the international book grew 17% YoY during 3QFY14. Domestic advances that grew 18% YoY were driven by strong 21% YoY growth in retail credit and robust 39% YoY growth in SME credit.

    Overseas book drive advance growth
    (Rs m) 0 % of total 5213021 % of total Change
    Advances 2,993,178   3,524,462   17.7%
    Domestic  1,959,860   2,242,940   14.4%
    % of total 65%   64%    
    Retail 353,920 11.8% 427,770 12.1% 20.9%
    Overseas 981,100 32.8% 1,147,720 32.6% 17.0%
               
    Deposits 4,147,330   5,037,720   21.5%
    CASA* 951,880 23.0% 1,100,320 21.8% 15.6%
    Tem deposits 1,976,890 47.7% 2,195,180 43.6% 11.0%
    Overseas  127,490 3.1% 220,340 4.4% 72.8%
    Credit deposit ratio 72.2%   70.0%    
    *Only domestic CASA has been included here

  • While the deposits grew by healthy 21.5% YoY, the CASA traction too stood robust. The domestic CASA deposits grew 15.6% YoY with fall in bulk deposits during 3QFY14.

  • The NII growth of 7.6% YoY was largely supported by fall in costs of deposits in international book and stable margins. The margins were recorded at 3% during the quarter and the company expects to close the year at the similar levels.

  • While the other income grew 10.9% YoY, the income from fees moderated during 3QFY14.

  • The overheads for the bank shot up during the quarter, reporting 25.7% spike YoY. Led by higher employee expenses on account of wage related provisions, the overheads for the company went up during the quarter. This in turn pushed the cost-income upwards to 45% levels during 3QFY14 from 39% same quarter a year ago.

  • The asset quality trends continue to weaken for the bank with burgeoning of bad loans and widening of restructured pipeline. While the fresh slippages and incremental restructuring looked down, the credit costs for the quarter stood higher. The gross NPAs were reported at 3.32% and net NPAs at 1.88% during 3QFY14, up from 2.41% and 0.51% respectively same quarter a year ago. The stock of restructured asset stood at Rs 223 bn as at the end of December 2013. On cumulative basis, this number constitutes 7.36% of the Bank's global advances . The rate of Slippage into NPAs (from the restructured loan-book) so far is around 20.2%.

  • As per BASEL II norms, the total capital adequacy for the company stands at 15.6% with Tier I comprising of 12.9% as at the end of December quarter. As per BASEL III norms, the total capital adequacy ratio stands at 12.01%.
What to expect?
At the current price of Rs 538, the stock is valued at 0.6 times our estimated FY16 adjusted book value.

The asset quality performance has not been at par with the management guidance so far and the bank's assets continue to experience stress. That said, the incremental slippages on sequential basis have been lower and the management is confident to improve it further backed by adequate recoveries and upgradation. The lumpiness in restructured assets is coming down. Also, the operational efficiencies need to be fixed up too.

BOB's business model, since historical times, stands most resilient as compared to other large PSU banks. However, until the NPA risks vividly subside, we reiterate our HOLD view on the stock.

We would recommend investors to not buy the stock at current levels despite the attractive valuations. Please ensure that no single stock forms more than 3-5% of your overall portfolio.

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