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Bank of Baroda: Margins see improvement
Apr 29, 2011

Bank of Baroda declared its FY11 (financial year 2011) results. The bank has reported 31% YoY and 39% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 48% YoY in FY11, on the back of 31% YoY growth in advances.
  • Other income grows by a marginal 3% YoY in FY11 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 2.7% in FY10 to 3.1% in FY11.
  • Net NPAs move up marginally from 0.34% in FY10 to 0.35% in FY11.
  • Net profit up 39% YoY in FY11; provisions on advances eat into the profits.
  • Capital adequacy ratio comfortable at 14.5% at the end of FY11.
  • The board recommends a dividend of Rs 16.5 per equity share, implying a dividend yield of 2%.

Rs (m) 4QFY10 4QFY11 Change FY10 FY11 Change
Interest income 43,538 63,342 45.5% 166,983 218,859 31.1%
Interest expense 26,089 37,203 42.6% 107,589 130,837 21.6%
Net Interest Income 17,450 26,139 49.8% 59,395 88,023 48.2%
Net interest margin (%)       2.7% 3.1%  
Other Income 7,669 8,345 8.8% 27,249 28,092 3.1%
Other Expense 9,645 15,026 55.8% 38,106 46,298 21.5%
Provisions and contingencies 3,773 5,904 56.5% 6,972 13,313 90.9%
Exceptional item* 815     815    
Profit before tax 12,515 13,554 8.3% 42,381 56,503 33.3%
Tax 3,452 611   11,797 14,086  
Effective tax rate 27.6 4.5%   27.8% 24.9%  
Profit after tax/ (loss) 9,063 12,944 42.8% 30,583 42,417 38.7%
Net profit margin (%) 20.8% 20.4%   18.3% 19.4%  
No. of shares (m)         391.5  
Book value per share (Rs)*         504.4  
P/BV (x)         1.8  
* (Book value as on 31st March 2011)
*Exceptional item refers to profit on sale of stake in UTI AMC.

What has driven performance in FY11?
  • Re-pricing loans at a faster clip helped Bank of Baroda sustain margins during the quarter, and during the full financial year ended March 2011. With 26% of its advances in overseas markets BOB grew its advance book by 31% YoY in FY11. While the overseas book grew at a faster clip, the domestic advances growth also outperformed the sector average. Despite pressure on overseas interest rates, the bank's margins (NIMs) improved from 2.7% in FY10 to 3.1% in FY11 due to favorable 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 came in marginally lower at 26% of total deposits in FY11 (27% in FY10).
    Overseas and retail drive advance growth
    (Rs m) FY10 % of total FY11 % of total Change
    Advances 1,750,350   2,286,760   30.6%
    Domestic 1,316,440   1,694,080   28.7%
    % of total 75%   74%    
    Agriculture 186,940 10.7% 135,270 5.9% -27.6%
    Retail 242,480 13.9% 324,350 14.2% 33.8%
    Home Loans 103,130 5.9% 125,390 5.5% 21.6%
    SME 211,110 12.1% 273,650 12.0% 29.6%
    Overseas 433,920 24.8% 592,690 25.9% 36.6%
               
    Deposits 2,412,620   3,054,390   26.6%
    Domestic 1,855,000   2,333,230   25.8%
    % of total 77%   76%    
    CASA 660,240 27.4% 801,810 26.3% 21.4%
    Tem deposits 1,194,760 49.5% 1,531,420 50.1% 28.2%
    Overseas 557,620 23.1% 721,160 23.6% 29.3%
    Credit deposit ratio 72.5%   74.9%    

  • BOB grew its fee income by just 13% YoY in FY11. Thus, the fees failed to shield the poor performance of the bank's trading portfolio in FY11 on account of an upward movement in interest rates. As a result, for the twelve month period, other income remained pretty much flat.

  • The bank's cost to income ratio declined from 44% to 40% for the global operations in FY11. For the overseas operations it stood at 20% in FY11.

  • The net NPAs went up marginally from 0.34% of total advances in FY10 to 0.35% in FY11. However, the bank maintained sufficient provision coverage of 85% in FY11. Gross NPAs for domestic operations were higher at 1.6% as against 0.6% for overseas operations in FY11.

  • BOB's overseas business contributed 25% of the bank's total business, 17% of profits and 32% of the fee based income in FY11.

  • The bank plans to hire another 4,000 employees in FY12.

What to expect?
At the current price of Rs 914, the stock is valued at 1.3 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 other income buffer has fallen short and incremental slippages are our concerns with regard to the bank. It also plans to initiatives to increase its advances and deposit market share. We shall soon review our forward estimates for the stock.

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