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Bank of Baroda: Signs of recovery

May 16, 2014 | Updated on Oct 30, 2019

Bank of Baroda (BOB) declared its results for the fourth quarter (4QFY14) and the financial year 2013-2014. The bank has reported 11.0% YoY growth in net interest income and 12.5% YoY growth in net profits for the quarter. For full year, the net profits have gone up meager 1.3% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income grows by mere 11.0% YoY in 4QFY14, on the back of robust 21% YoY growth in advances.
  • Other income grows by 11.4% YoY in 4QFY14, full year FY14 reported 22.9% YoY growth. The fee-based income helps boost the other income of the bank during 4QFY14.
  • Despite fall in costs on overseas deposits, global NIMs move lower from 2.5% in 4QFY13 to 2.3% in 4QFY14 primarily on account of lower global yields and higher domestic costs of deposits.
  • Net NPAs move up sharply from 1.28% in FY13 to 1.52% in FY14.
  • Net profits grow 12.5% YoY in 4QFY14 and modest 1.3% YoY in FY14; decent core earnings performance and lower provisions boost the profitability. Moreover, the tax reversals too beef up the profits for the quarter.
  • Capital adequacy ratio stands at 12.30% at the end of FY14. The Tier I ratio stands at 9.28%.

Rs (m) 4QFY13 4QFY14 Change FY13 FY14 Change
Interest income 90,716 102,886 13.4% 351,967 389,397 10.6%
Interest expense 62,576 71,643 14.5% 238,814 269,744 13.0%
Net Interest Income 28,140 31,243 11.0% 113,153 119,654 5.7%
Net interest margin (%) 2.5% 2.3%        
Other Income 11,909 13,263 11.4% 36,306 44,627 22.9%
Other Expense 18,229 18,710 2.6% 58,721 70,749 20.5%
Provisions and contingencies 15,984 11,532 -27.9% 41,679 37,937 -9.0%
Exceptional item* 373 156 -58.3% 746 622 -16.7%
Profit before tax 5,463 14,109 158.2% 48,312 54,973 13.8%
Tax -4,825 2,536 -152.6% 3,505 9,562 172.8%
Effective tax rate -88.3% 18.0%   7.3% 17.4%  
Profit after tax/ (loss) 10,289 11,573 12.5% 44,807 45,411 1.3%
Net profit margin (%) 11.3% 11.2%   12.7% 11.7%  
No. of shares (m)         430.7  
Book value per share (Rs)*         835.6  
P/BV (x)         1.1  
* (Book value as on 31st March 2014)

What has driven performance in FY14?
  • Defying challenging business dynamics and improving credit quality trends, BoB has reported decent profitability during the last quarter of FY14 just after a fall in profits in the previous quarter. However, the profits for FY14 were 6.6% down than our estimates on account of lower interest income as against our expectations. Nonetheless, we are satisfied with the bank's concerted efforts to focus on asset quality issues and maintain the credit growth momentum which tells us that the bank is gradually coming out of the woods and is poised to grow going forward. Furthermore, our estimated gross NPA for FY14 at 3% of advances are exactly in-line with the reported numbers and we maintain our positive stance on the asset quality trends of BoB for the next two years.

  • On the business front, the advances have grown by robust 21% YoY; primarily driven by strong growth in retail, SME and overseas segments. Each segment has reported 20%+ growth levels during FY14 which is indicative of a healthy business visibility for Bank of Baroda going forward. Even deposits maintained their accelerated pace and have reported healthy 20% YoY growth. The low-cost deposits have grown by decent 11.7% YoY and the overseas deposits have grown by staggering 26.2% YoY. The CASA ratio has improved to 31.8% at end of March 2014 from 30.4% a year ago.

  • The robust loan growth translated into decent 11% YoY growth in NII; albeit lower than our expectations. That's because the interest expenses have stood higher for the bank during 4QFY14. However, margins for the quarter have not been encouraging enough. Despite fall in costs on overseas deposits, global NIMs have trended down to 2.3% in 4QFY14 from 2.5% in 4QFY13 primarily on account of lower global yields and higher domestic costs of deposits.

    Business growth accelerates
    (Rs m) FY13 % of total FY14 % of total Change
    Advances 3,281,858   3,970,058   21.0%
    Domestic 2,242,940   2,721,690   21.3%
    % of total 68%   69%    
    Retail 380,460 11.6% 460,190 11.6% 21.0%
    Home Loans 160,450 4.9% 195,580 4.9% 21.9%
    SME 467,220 14.2% 566,340 14.3% 21.2%
    Overseas 1,038,910 31.7% 1,248,370 31.4% 20.2%
    Deposits 4,738,830   5,688,940   20.0%
    Domestic 3,417,060   3,790,540   10.9%
    % of total 72%   67%    
    CASA* 929,480 19.6% 1,038,090 18.2% 11.7%
    Tem deposits 2,487,580 52.5% 2,752,450 48.4% 10.6%
    Overseas 1,047,360 22.1% 1,321,780 23.2% 26.2%
    Credit deposit ratio 69.3%   69.8%    
    *Only domestic CASA has been included here

  • Keeping fee-based income as its focus as mentioned in the last quarter, the bank has reported decent other income performance. Fee income has grown 14.5% YoY during 4QFY14. For the full year too, the fee income growth has sustained at similar levels. The total non-interest income has reported 11.4% YoY growth during 4QFY14 and healthy 22.9% YoY growth for FY14.

  • Expenses for the quarter stood steady and increased by mere 2.6% YoY, bringing down the cost-income ratio to 42% in 4QFY14 from 46% in 4QFY13. For the full year, however, the operating expenses were seen up by 20.5% YoY as the staff expenses have moved up. Pension fund liabilities and increased employee base for FY14 led to spike in operating costs for the bank. That said, over the years, the cost metrics for BOB has witnessed enhancement on annual basis. And will continue to do so.

  • The March quarter (4QFY14) marked improvement in asset quality trends for BoB with moderation in impaired assets. The gross non-performing asset (NPA) stood at 2.94% in 4QFY14 in comparison to 3.32%, on a QoQ basis. Net NPAs were at 1.52% as against 1.88% again on sequential basis. The fresh slippages are down to Rs 12.95 bn in 4QFY14 from 19.6 bn at the beginning of the year. Agri, large industries and MSME have largely contributed to the NPAs of the bank. The bank's provision coverage ratio has also improved to 65.5% as at the end of March quarter 2014.

  • The bank has restructured loans to the tune of Rs 11.6 bn (6,556 accounts) in 4QFY14 as against Rs 12.1 bn (6,173 accounts) in 3QFY14. For the full year FY14, the amount restructured has been reported at Rs 63.9 bn as against Rs 85.1 bn in FY13. The restructured pipeline stands at Rs 13-14 bn as at the end of FY14.

  • The bank hired 5,810 employees in FY14. Furthermore, it added 601 new branches in FY14 and proposes to open 625 new branches during FY15 under its branch expansion plan. Around 36.4% of the bank's network at the end of FY14 was situated in rural areas.

  • BOB reported healthy capital adequacy ratio at 12.3% as on 31st March 2014 with comfortable Tier I capital at 9.3%. The bank has sought capital infusion from the government to the tune of Rs 12 bn in FY15.

What to expect?
At the current price of Rs 878, the stock is valued at 0.9 times our estimated FY16 adjusted book value.

Re-balancing of loan book has been yielding desirable results for BOB. The bank's effort to curtail its slippages thereby paving way for healthy asset quality bodes well for its return ratios and valuations. That the bank is getting closer to recovery is true, but we maintain a conservative stance given the macro challenges and hence would revise our top-line estimates marginally downwards. We remain sanguine about the bank's asset quality and hence stick to our NPA estimates that mark improving trends.

Given the relatively higher NPA levels, we reiterate HOLD view on the stock. Nonetheless, we reckon Bank of Baroda as a frontrunner in the PSU banking space and expect the bank to recover from its asset quality problems over time.

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Jun 25, 2021 03:35 PM


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