Bank of Baroda (BOB), one of the largest public sector banks in the country, reported robust results for FY03 with strong gains seen in its bottomline. BOB has reported a 42% growth in its bottomline, however, on an almost flat topline growth of 2%. The healthy performance of its bottomline can be mainly attributed to the fall in interest expenses and a strong growth in other income arising from sale of investments. The bank has also done well enough to control costs, thus improving upon its operating margins.
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While the bottomline performance of the bank has been good, the company seems to have faltered at the topline. This, in part, can be explained by the sluggish growth in total advances of the bank, which stood at 5% for FY03. This, in comparison to the average industry growth rate of 12% (net of merger), is a disappointment. A falling interest rate scenario has also eaten into the interest income of the bank. BOB's yield on advances has fallen to 8.8% from 9.9% last year. That said, falling interest rates helped BOB to mitigate the effect of poor topline. Due to lower interest expenses, the bank has been able to post a net interest income growth of 12% in FY03. Due to the growth in net interest income, net interest margins (NIM) have also improved over FY02. NIM in FY03 stood at 2.9% compared to 2.8% in FY02. However, we must also point out that due to a soft interest rate scenario, further improvement in NIM may be an uphill task and it may stagnate at this level.
BOB has also been able to improve its operating efficiencies, thus helping it further improve its operating profits. Due to lack of need for setting up new branches (unlike private sector banks), costs seem to have been controlled. However, going forward, due to the needs of integrating a large branch network and setting up an ATM network, the operating costs of the bank are likely to go up. But the increase in costs are not likely to significantly impact the operating margins of the bank.
Apart from improvement in operating parameters, BOB, like most other public sector banks, has been positively impacted by strong growth in other income, mainly due to profit from sale of investments. In FY03, close to 50% of total other income was derived from profit from sale of investments. This shows the reliance of the bank on this source of income. BOB has however stated that it has close to Rs 30 bn in un-booked profits on its G-Sec portfolio and with the interest rates remaining soft, we are likely to see strong growth in other income going forward.
The stock, at Rs 113, is trading at a P/E multiple of 4x its FY03 earnings. Bottomline performance of the bank has been robust in FY03, however its topline performance has been a disappointment. Both, private sector as well as public sector peers, seem to be eating in to the market share of the bank. What is however disturbing is the fact that despite having a huge branch network, the bank has not been able to garner a larger share of the incremental advances given out by the banking sector. Going forward, the biggest challenge for the bank is to integrate its large branch operations as well as reorient its employees to the new competitive realities in the Indian banking sector. Integration will bring about further efficiencies in the operations of the bank, which is likely to lead to stronger business growth going forward.
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