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Bank of Baroda: Huge spike in provisions
May 14, 2012

Bank of Baroda declared its FY12 (financial year 2012) results. The bank has reported 36% YoY and 18% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance Summary
  • Net interest income grows by 17% YoY in FY12, on the back of 26% YoY growth in advances.
  • Other income grows by 22% YoY in FY12 but increases by only 8% in 4QFY12 on flat fee income growth.
  • Despite yields on overseas assets remaining substantially low, global NIMs moves only marginally lower from 3.1% in FY11 to 3.0% in FY12.
  • Net NPAs move up from 0.35% in FY11 to 0.54% in FY12 on higher slippages.
  • Net profit up 18% YoY in FY12; provisions on advances eat into the profits.
  • Capital adequacy ratio comfortable at 14.67% at the end of FY12.
  • The board recommends a dividend of Rs 17 per equity share, implying a dividend yield of 3%.

Rs (m) 4QFY11 4QFY12 Change FY11 FY12 Change
Interest income 63,342 81,185 28.2% 218,859 296,737 35.6%
Interest expense 37,203 53,211 43.0% 130,837 193,567 47.9%
Net Interest Income 26,139 27,974 7.0% 88,023 103,170 17.2%
Net interest margin (%)       3.1% 3.0%  
Other Income 8,345 8,978 7.6% 28,092 34,223 21.8%
Other Expense 15,026 16,443 9.4% 46,298 51,090 10.3%
Provisions and contingencies 5,904 8,437 42.9% 13,313 25,548 91.9%
Exceptional item**   107     498  
Profit before tax 13,554 11,965 -11.7% 56,503 60,258 6.6%
Tax 611 -3,217   14,086 10,188 -27.7%
Effective tax rate       24.9% 16.9%  
Profit after tax/ (loss) 12,944 15,182 17.3% 42,417 50,070 18.0%
Net profit margin (%) 20.4% 18.7%   19.4% 16.9%  
No. of shares (m)         411.1  
Book value per share (Rs)*         639.8  
P/BV (x)         1.0  
* (Book value as on 31st March 2012)
*Charge on taking over the Assets & Liabilities of Memon Co-operative Bank

What has driven performance in FY12?
  • Bank of Baroda (BOB) was able to sustain its net interest margins (NIMs) during FY12, despite lower overseas yields and higher costs. The bank consciously decided to shed its exposure to high cost bulk deposits. With 30% of its advances in overseas markets BOB grew its advance book by 26% YoY in FY12. Even domestically it saw a growth of 19%, which came in higher than as per RBI guidance of 16% for non-food credit growth in FY12. The overseas book grew at a faster clip due to significant rupee depreciation during the period, but even adjusting for the same, the growth was good.

  • The proportion of low cost deposits (CASA) in the domestic portfolio came in lower at 24% of total deposits in FY12 (26% in FY11). CASA growth slowed down to some extent, as customers preferred to opt for term deposits, on account of the higher prevailing interest rates in India. Irrespective, the bank has been able to grow CASA at a sharper click versus the system. Management has made an effort to ensure the growth of the CASA base despite the tough economic environment.

    Overseas and SME drive advance growth
    (Rs m) FY11 % of total FY12 % of total Change
    Advances 2,286,760   2,873,770   25.7%
    Domestic 1,694,080   2,020,750   19.3%
    % of total 74%   70%    
    Retail 324,350 14.2% 356,680 12.4% 10.0%
    Home Loans 125,390 5.5% 141,330 4.9% 12.7%
    SME 273,650 12.0% 345,120 12.0% 26.1%
    Overseas 592,690 25.9% 853,020 29.7% 43.9%
               
    Deposits 3,054,390   3,848,710   26.0%
    Domestic 2,333,230   2,801,350   20.1%
    % of total 76%   73%    
    CASA 801,810 26.3% 929,480 24.2% 15.9%
    Tem deposits 1,531,420 50.1% 1,871,870 48.6% 22.2%
    Overseas 721,160 23.6% 1,047,360 27.2% 45.2%
    Credit deposit ratio 74.9%   74.7%    

  • BOB grew its fee income by just 14% YoY in FY12. However trading gains and increased profit on exchange transactions helped increase the other income by 22% YoY in FY12. In 4QFY12, fee income was flat seeing just a 2% YoY growth, thus other income grew by a muted 8% in 4QFY12.

  • The bank's cost to income ratio decreased from 40% to 37% for the global operations in FY12. This ratio has been on a declining trend for the past five years, showing the operating efficiency of the bank. For the overseas operations it stood at 17% in FY12.

  • The net NPAs went up from 0.35% of total advances in FY11 to 0.54% in FY12. However, the bank maintained sufficient provision coverage of 80.05% in FY12. Gross NPAs for domestic operations were higher at 1.9% as against 0.7% for overseas operations in FY12. The company's asset quality saw a deterioration based on higher slippages of Rs 13 bn during the quarter which included a large media account. Its NPAs in the large and medium enterprises have seen a fall. However, its agri, retail, gross NPAs have seen a spike. Small scale industry NPAs saw a spike from 1.25% in FY11 to 2.24% in FY12.

  • Further, the bank saw an increase in its restructured accounts. Loans worth Rs 85 bn were restructured in the 12 month period from April-March 2012. Restructuring in the fourth quarter was a massive Rs 53 bn, seeing a huge spike. The financial crisis continues to affect certain borrowers and these accounts were restructured keeping in mind their financial viability.

    With this massive restructuring a number of lumpy accounts have been taken care off. All the State Electricity Boards (SEBs) which needed restructuring have been provided with, amounting to Rs 20 bn. The Air India account, amounting to Rs 24 bn was also dealt with. The interest income reversal has been taken care of in this quarter, which contributed somewhat to the decline in NIMs. The loss on the Net Present Value (NPV) front will be taken over the next 2 years as per the special dispensation from the Reserve Bank of India (RBI). BOB has taken the entire hit on this front this year, and does not see much difficulty in maintaining asset quality going forward.

  • BOB's overseas business contributed 28% of the bank's total business, 21% of gross profits and 34% of the core fee based income in FY12.

  • The bank hired another 3,250 employees in FY12. During FY12, BOB opened 540 new branches and it plans to open 572 new branches during FY13.

  • The bank raised Rs 16.4 bn during the year from allotting 19.5 m equity shares to Life Insurance Corporation of India (LIC) on a preferential basis. Post this infusion, the capital adequacy ratio of the bank stands at a comfortable 14.67%, with a Tier 1 ratio of 10.8%. Post this, the government holding in the bank has come down from 57.03% to 54.3%.

What to expect?
At the current price of Rs 640.5, the stock is valued at 0.8 times our estimated FY14 adjusted book value. The bank has shown a robust performance on the operating front despite a tough macro-economic environment, especially on the NII front and even growth in other income was robust for the full year period. On account of its extensive presence overseas, BOB has greater headroom to absorb higher cost of funds.

The bank has seen a strong growth in its overseas loan book as well as from the small and medium enterprises (SME) space. The robust growth from SMEs has mainly come from the services space, as the manufacturing sector has been affected by the slowdown. It has seen a broad based expansion in the loan book and has strategically gone slow on certain accounts like retail etc. The bank expects to grow ahead of the sector in FY13 as well. The bank has controlled its lending to certain sectors where it feels there may be stress going forward such as real estate, telecom, and electricity boards etc. The huge spike in restructured assets, however, is a concern. However, as per the bank's management, most of the lumpiness has been taken care of and the big accounts such as Air India and SEBs have been provided for. Incremental delinquencies may not come at the same pace going forward.

BOB has sufficient headroom on the capital front post the capital infusion from LIC. The bank reiterated its target of growing ahead of the industry average and maintains its NIMs. We continue to maintain our positive view on the stock on account of its reasonable valuations, and the fact that it continues to outperform the sector.

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