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Bank of Baroda: Well rounded FY08 - Views on News from Equitymaster

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Bank of Baroda: Well rounded FY08

May 20, 2008

Performance summary
  • Interest income grows by 31% YoY in FY08, on the back of 28% YoY growth in advances.
  • Other income grows by 48% YoY.

  • Net interest margins sustained at 2.9% in FY08 (3.0% in FY07).

  • Overseas business contributed to 24% of net profit.

  • Cash recoveries being commensurate with incremental slippages - saves NPA blushes.

  • Has declared dividend of Rs 8 per share (dividend yield 2.7%).

Rs (m) FY07 FY08 Change FY07 FY08 Change
Interest income 26,209 33,311 27.1% 90,041 118,135 31.2%
Interest Expense 15,674 23,025 46.9% 54,266 79,017 45.6%
Net Interest Income 10,535 10,286 -2.4% 35,775 39,118 9.3%
NIM (%)       3.0% 2.9%  
Other Income 4,488 5,546 23.6% 13,818 20,510 48.4%
Other Expense 7,584 7,686 1.3% 25,443 29,343 15.3%
Provisions and contingencies 3,117 4,249 36.3% 7,607 8,214 8.0%
Profit before tax 4,322 3,897 -9.8% 16,543 22,071 33.4%
Tax 1,866 1,131 -39.4% 6,278 7,716 22.9%
Profit after tax / (loss) 2,456 2,766 12.6% 10,265 14,355 39.8%
Net profit margin (%) 9.4% 8.3%   11.4% 12.2%  
No. of shares (m)       365.5 365.5  
Book value per share (Rs)*         260.7  
P/BV (x)         1.1  
* (Book value as on 31st March 2008)

What has driven performance in FY08?
  • No hiccups: Largely falling in line with our estimates and showing no major hiccups in its overseas business, Bank of Baroda (BoB) clocked 27.6% YoY growth in advances in FY08, garnering 20% of the same from its overseas operations (through 75 overseas offices). The growth in domestic deposits was, however, higher than the overseas deposits as the bank increased the proportion of domestic term deposits in its books. BoB plans to continue the thrust on overseas business and take its share to 25% in the next three years from the current 20%. The bank is targeting its deposits and advances to grow by 18.0% YoY and 22.0% YoY in FY09. While share of SME and retail segments in the advance book are expected to move up to 15.5% and 22.0% respectively, the share of CASA is expected to go up to 38%. Further, the bank hopes to sustain the level of NIM at 3.0% in FY09 (2.9% in FY08) by passing on the rate hike on incremental advances.

    Retail takes backseat
      FY07 % of total FY08 % of total Change
    Advances 836,217   1,067,013   27.6%
    Domestic 672,491   845,033   25.7%
    % of total 80%   79%    
    Agriculture 103,663 12.4% 132,689 15.7% 28.0%
    Retail 143,277 17.1% 168,923 15.8% 17.9%
    SME 90,069 10.8% 118,080 11.1% 31.1%
    Overseas 163,726   221,980   35.6%
    Deposits 1,249,253   1,520,341   21.7%
    Domestic 997,301   1,224,801   22.8%
    % of total 80%   81%    
    CASA 384,958 38.6% 439,704 35.9% 14.2%
    Term deposits 612,343 61.4% 785,098 64.1% 28.2%
    Overseas 251,952   295,540   17.3%

  • Costs evening out: The bank’s cost to income ratio dropped from 51% in FY07 to 49% in FY08. This because of the natural attrition of some of its employees. Further, in the next 3 to 4 years, around 4,000 employees of the bank will be retiring, thus considerably lightening its wage burden (as most of these employees are in the high salary bracket). For filling the requisite vacancies, the bank will be recruiting around 300 people each year for the next 3 to 4 years, at relatively lower salary levels as compared to the retirees. We expect this to rationalise the bank's overheads and bring down its cost to income ratio at par with that of its peers in the sector. The cost to income ratio in the overseas operations was at a relatively lower 25% (27% in FY07).

  • Growth in other income has been largely attributed to the growth of treasury income (30% of other income) while fee income (9% of total income) grew by 14% YoY.

  • Cash recoveries buoy bottomline: While Bank of Baroda has witnessed a 5.3% YoY reduction in the absolute value of its gross NPAs over the last 12 months; the net NPAs too have declined from 0.6% of total advances in FY07 to 0.5% in FY08. More importantly, the growth in cash recoveries substantially reduced the provisioning requirement for the bank in FY08. The NPA coverage ratio stood at a comfortable 74% at the end of FY08.

    Where the risk lies…
    Gross NPAs (%) FY06 FY07 FY08
    Agriculture 5.0 4.1 3.4
    SSI 10.0 4.7 3.4
    Total priority sector 6.3 4.4 4.2
    Large industries 4.8 2.5 1.4
    Retail advances 2.1 2.2 3.0
    SME N.A N.A 2.4
    Housing loans 3.1 3.5 3.4
    Overseas advances 1.3 0.7 0.6
    Domestic advances 4.4 2.8 2.2

    In the international operations, gross NPAs are at 0.6% while the net NPAs are zero. While higher recoveries and an adequate coverage ratio dilute some concerns on this front, the NPA level in retail loans (3.0% in FY08) remains a peril.

What to expect?
At the current price of Rs 291, the stock is valued at 0.8 times our estimated FY10 adjusted book value. The bank has marginally outperformed our broad asset growth and margin estimations and we will need to upgrade our forward estimations if the same continues in the forthcoming quarters of this fiscal. Adequate capital, a high provisioning cover, exposure in overseas markets and reasonable consistency in net interest margins makes it a de-risked play in the PSU banking space.

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