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BoB: Well balanced FY09 - Views on News from Equitymaster
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BoB: Well balanced FY09
Apr 30, 2009

Performance summary
  • Interest income grows by 28% YoY in FY09, on the back of 33% YoY growth in advances.
  • Other income grows by 27% YoY backed by growth in fee income.
  • Net interest margins at 3.1% for domestic operation and 2.9% for global operations at the end of FY09.
  • Net NPAs decline from 0.5% in FY08 to 0.4% in FY09.
  • Capital adequacy ratio very comfortable at 13.2% (as per Basel II) at the end of FY09.

Rs (m) 4QFY08 4QFY09 Change FY08 FY09 Change
Interest income 33,311 41,387 24.2% 118,134 150,915 27.7%
Interest Expense 23,025 26,680 15.9% 79,017 99,682 26.2%
Net Interest Income 10,286 14,707 43.0% 39,117 51,233 31.0%
NIM (%)       2.9% 2.9%  
Other Income 5,546 8,536 53.9% 20,510 27,576 34.5%
Other Expense 8,686 10,199 17.4% 30,343 35,761 17.9%
Provisions and contingencies 3,250 2,100 -35.4% 7,220 9,620 33.2%
Profit before tax 3,896 10,944 180.9% 22,064 33,428 51.5%
Tax 1,130 3,420 202.7% 7,720 11,160 44.6%
Profit after tax / (loss) 2,766 7,524 172.0% 14,344 22,268 55.2%
Net profit margin (%) 8.3% 18.2%   12.1% 14.8%  
No. of shares (m)       365.5 365.5  
Book value per share (Rs)*         312.6  
P/BV (x)         1.0  
* (Book value as on 31st March 2009)

What has driven performance in 4QFY09?
  • Correction in interest rates globally in FY09 led to Bank of Baroda’s overseas business sustaining a stronger momentum as compared to the bank’s domestic business. A fillip in domestic advance growth, particularly SME and agriculture segments helped Bank of Baroda (BoB) grow its domestic advances by 29% in FY09. The proportion of low cost deposits in the domestic portfolio, however, shrunk from 36% to 35% of total deposits in FY09. While the yield on domestic advances improved by 0.4%, that on overseas advances dropped by 1% YoY in FY09. At the same time, the cost of domestic deposits increased by 0.4%, that on overseas deposits dropped by 1.5% YoY in the third quarter. Hence, with the cost arbitrage and its pricing power, the bank managed to sustain its global NIMs while improving its domestic NIMs by nearly 0.3% to 3.2% in FY09. While the growth in advances is 11% higher than our estimates, the NIMs are also higher by nearly 0.3%.

    Overseas business sustains momentum
    Rs (m) FY08 % of total FY09 % of total Change
    Advances 1,067,354   1,439,860   34.9%
    Domestic 845,189   1,092,830   29.3%
    % of total 79%   76%    
    Agriculture 132,635 15.7% 169,640 15.5% 27.9%
    Retail 168,968 20.0% 196,510 18.0% 16.3%
    SME 118,052 14.0% 146,620 13.4% 24.2%
    Overseas 222,164   347,030   56.2%
    Deposits 1,519,724   1,923,970   26.6%
    Domestic 1,224,992   1,514,090   23.6%
    % of total 81%   79%    
    CASA 440,348 35.9% 528,417 34.9% 20.0%
    Term deposits 784,644 64.1% 985,673 65.1% 25.6%
    Overseas 294,732   409,880   39.1%

  • After having stagnancy in its fee revenues over several quarters, BOB seems to have finally drawn focus on this counter to shield its profits from getting eroded by the lower NIMs and treasury losses. Fee income backed by growth in commissions and forex income grew by 40% to form 16% of total income at the end of FY09. The bank currently has 72% of investments in the HTM basket.

  • The bank’s cost to income ratio dropped from 51% in FY08 to 45% in FY09 due to the implementation of core banking solution at 100% of branches and natural attrition.

  • The net NPAs declined from 0.5% of total advances in FY08 to 0.3% in FY09. More importantly, the growth in cash recoveries substantially reduced the provisioning requirement for the bank in FY09. The NPA coverage ratio stood at a comfortable 76% at the end of FY09. Gross NPAs declined from 1.8% to 1.3% in FY09. NPAs in the retail and housing segments were lower at 2.4% and 2.9% respectively at the end of FY09 (3.0% and 4.1% respectively at the end of FY08).

  • BoB is targeting an overall business growth of 23% to 25% in FY10, while growing its fee based income by at least 25% YoY.

What to expect?
At the current price of Rs 327, the stock is valued at 0.8 times our estimated FY11 adjusted book value. The bank has outperformed our broad asset growth and margin estimates in FY09 and we will have to factor in the same. While we draw comfort from the bank’s adequate capital and high provisioning cover, low fee income proportion and exposure to overseas markets are our concerns with regard to the bank. We maintain our positive view on the stock.

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