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Bank of Baroda: Overseas assets foil margins
Apr 30, 2010

Bank of Baroda declared its FY10 results. The bank has reported 11% YoY growth in interest income while net profits have grown by 37% YoY. Here is our analysis of the results.

Performance summary
  • Interest income grows by 11% YoY in FY10, on the back of 22% YoY growth in advances.
  • Other income grows by 2% YoY backed by lower growth in treasury income.
  • With yields on overseas assets getting re-priced substantially lower, global NIMs drop from 2.9% in FY09 to 2.7% in FY10.
  • Net NPAs move up from 0.31% in FY09 to 0.34% in FY10.
  • Capital adequacy ratio comfortable at 14.4% at the end of FY10.


Rs (m) FY09 FY10 Change FY09 FY10 Change
Interest income    41,388      43,538 5.2%    150,916 166,983 10.6%
Interest Expense    26,680      26,089 -2.2%       99,682    107,589 7.9%
Net Interest Income    14,708      17,449 18.6%       51,234       59,394 15.9%
NIM (%)       2.9% 2.7%  
Other Income      8,536         7,669 -10.2%       26,626       27,250 2.3%
Other Expense    10,199         9,645 -5.4%       35,761       38,106 6.6%
Provisions and contingencies      2,097         3,773 79.9%         9,621         6,972 -27.5%
Exceptional item *             -               815              950            815 -14.2%
Profit before tax    10,948      11,700 6.9%       32,478       41,566 28.0%
Tax      3,420         3,452 0.9%       11,157       11,797 5.7%
Profit after tax / (loss)      7,528         9,063 20.4%       22,271       30,584 37.3%
Net profit margin (%) 18.2% 20.8%   14.8% 18.3%  
No. of shares (m)             364.3         364.3  
Book value per share (Rs)*                 378.4  
P/BV (x)                      1.8  
* (Book value as on 31st March 2010)
*Exceptional item refers to profit on sale of stake in UTI AMC.

What has driven performance in FY10?
  • Having an exposure of 25% of its advances in overseas markets did not do any good to Bank of Baroda in FY10. The pressure on overseas interest rates took a toll on the bank's margins (NIMs). Bank of Baroda (BoB) grew its global advances and global deposits by 22% and 25% respectively in FY10. 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 was 36% of total deposits in FY10. BOB increased its exposure to SME and agricultural assets while cutting down its retail loan book in the last few quarters. While the bank hopes to sustain the level of NIM in the range of 2.5% to 3% in FY10, we have been conservative in our forward estimations as well given the pressure on overseas yields.

    Overseas book leads growth
      FY09 % of total FY10 % of total Change
    Advances 1,432,520   1,750,360   22.2%
    Domestic 1,085,490   1,316,440   21.3%
    % of total 76%   75%    
    Agriculture       169,640 11.8%        216,170 16.4% 27.4%
    Retail       196,280 13.7%        242,480 13.9% 23.5%
    SME       146,620 10.2%        211,110 12.1% 44.0%
    Overseas       347,030          433,920   25.0%
               
    Deposits    1,923,970       2,410,450   25.3%
    Domestic    1,514,090       1,852,830   22.4%
    % of total 79%   77%    
    CASA       527,890 34.9%        660,240 35.6% 25.1%
    Term deposits       986,200 65.1%     1,192,590 64.4% 20.9%
    Overseas       409,880          557,620   36.0%

  • Although, BOB seems to have drawn focus on its fee income to shield its profits from getting eroded by the lower NIMs and treasury losses a large part of the other income in FY10 were primarily from trading gains. Fee income backed by growth in commissions and forex income grew by 20% to form 33% of total other income at the end of FY10.

  • The bank's cost to income ratio was 47% for the domestic operations and 22% for the overseas operations in FY10. Overall cost to income ratio was 46% in FY10.

  • The net NPAs went up marginally from 0.31% of total advances in FY09 to 0.34% in FY10. However, sufficient provision coverage of 75% substantially reduced the provisioning requirement for the bank in FY10. Gross NPAs were also higher at 1.4% as against 1.3% in FY09.

  • BOB's overseas business contributed 24% of the bank's total business, 20% of profits and 36% of the fee based income in FY10.

What to expect?
At the current price of Rs 690, the stock is valued at 1.3 times our estimated FY12 adjusted book value. The bank has marginally outperformed our broad asset growth and margin estimations in FY10. While we draw comfort from the bank's adequate capital and high provisioning cover, the low fee income proportion and incremental slippages are our concerns with regard to the bank. We maintain our positive view on the stock.

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