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BOB: Taking positive strides

Apr 12, 2001

Bank of Baroda (BOB), India's premier nationalized bank and the second largest among Indian banks based on its overseas network, was established in 1908. It now has over 2,600 branches, including 38 overseas and several subsidiaries around the world. Notwithstanding its nationalised bank status, BOB has taken several major initiatives to achieve global standards in banking. It has appointed Gartner, world-renowned IT consulting firm to evolve its business and IT strategies. With the help of Gartner, BOB will expand its activities in core banking, Internet banking and increase delivery channels - ATMs and Kiosks. These will enable the bank reach customers using wide area networking.

During the year FY01, BOB has launched three new products under the name OmniBOB and become the first nationalized bank to introduce smart-card based on-line products at over 250 branches all over the country. The three products launched were: AnyBOB, a smart card based any branch banking service, DialBOB, a centralized telebanking service and connect BOB, an e-banking service, which can also be accessed by mobile phones. It has computerized over 1,200 branches, covering 72% of its Indian business. The bank currently has 25 ATMs and plans to increase the number to 300 in the next three to six months. In its continuous thrust for up-gradation of technology, the bank plans to invest Rs 2.5 3.0 bn in the next 2 to 3 years.

It has also introduced better cash management product, BOB Cash Reach for customer convenience using these technologies. The initiatives taken by the bank are expected to enhance customer satisfaction and achieve higher volumes of business, which are expected to improve its bottomline growth in the coming years.

The performance of the bank during the first nine months of FY01 is satisfactory. While its topline grew by 13%, profits witnessed a growth of 16%. Its operating margins of 33.4% are among the best in the sector. This is due to low cost of funds as saving account deposits contributed 21% to total deposits as on FY00. BOB is planning to achieve a growth of around 20% in retail advances in the next 2-3 years from the current 7.5%. This will bring down the cost of funds further resulting in higher operating margins. To reduce the operating cost further, it had launched voluntary retirement scheme in FY01 and received 6,731 (14% of total employees of 47,054) applications for the same. The scheme is expected to cost the bank Rs 5 bn but it would significantly add to its returns on equity in future.

Financial snapshot
(Rs m)4QFY004QFY01EChange9m FY009m FY01Change
Interest Income 13,984 16,797 20.1% 38,218 43,235 13.1%
Total Income 16,231 18,976 16.9% 42,385 47,278 11.5%
Interest Expenses 9,236 10,967 18.7% 25,831 28,774 11.4%
Operating Profit 6,996 8,009 14.5% 16,554 18,504 11.8%
Other Expenses 3,447 3,765 9.2% 9,063 9,757 7.7%
Depreciation 242 346 42.6% 281 375 33.2%
Profits Before Tax 3,307 3,898 17.9% 7,210 8,372 16.1%
Tax 1,081 1,282 18.6% 1,320 1,540 16.7%
Profits After Tax 2,226 2,616 17.5% 5,890 6,832 16.0%
Provisions & contingencies 918 1,011 10.2% 2,170 2,540 17.1%
Net Profit 1,308 1,605 22.7% 3,720 4,292 15.4%
Equity shares (m) 296 296 296 296

Key ratios
(Rs m)4QFY004QFY01E9m FY009m FY01
OPM 34.0%34.7%32.4%33.4%
Tax / PBT32.7%32.9%18.3%18.4%
NPM13.7%13.8%13.9%14.5%
EPS (Rs)17.721.716.719.3

Apart from these positives, there are certain concerns over BOBs future profit growth. The bank derives 38% of its operating income from investments. It has an exposure of around 21% of total net-worth in the equity markets (Rs 500 m in shares). However, the bank indicated that it did not finance any kind of stock market lending to brokers. Considering the recent downfall in the capital markets, BOB may have to make higher provisions for diminution in the value of its investments. This could impact its profits growth during the year.

At the current market price of Rs 42, Bank of Baroda is trading at a P/E of 2.1 times FY01 projected earnings and a Price/Book Value ratio of 0.3 times. The bank is expected to record a rise of 13% in total income and 17% in profits for the year ended March 01. Its capital adequacy ratio of 12% and non-performing assets to advances ratio of 7% are in line with its public sector peers. Adaptation to technology will help the bank in streamlining all procedures and reducing processing time. The valuations will be re-rated once its shows improved performance in the coming year with these strategies.

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