Bank of Baroda is India's second largest public sector bank with a network of 2,652 branches. The bank's customer base is about 20 m, which is one of the widest in the banking sector.
Over the last six years, the bank's net profits grew at a compounded annual growth rate of 24%. The growth pace however slowed down in the last three years due to competitive pressure from private sector banks. The net profits grew at a CAGR of just 4.4% from the fiscal year beginning 1998.
Despite the challenging environment, BOB has maintained its interest spread at 4.4% in the last three years. Its RONW at 15.5% is also in line with the other nationalised banks. The bank is however weak in generating revenues from other sources. Unlike other public sector banks, BOB's other income grew at a marginal CAGR of 8.7% in the last three years. To increase the proportion, BOB has drawn a plan to adopt technology and thereby attract more customers. It has also started offering cash management services. In FY01, the bank has launched several new services including centralized telebanking, e-banking in selective branches and a smart card based 'any branch' banking service. 45% of its branches covering 72% of its domestic business are computerized. BOB aims to invest Rs 3 bn in IT in the next 2-3 years, which will place the bank in line with its peers. These IT initiatives could aid the bank in maintaining its customer base and extend the new products through the efficient delivery channels which in turn could boost other income growth.
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The performance of the bank during the first nine months of FY01 is satisfactory. While its topline grew by 13%, profits witnessed a growth of 16%. The bank is expected to post topline growth of 13% for the year ended March '01. Industrial slowdown beginning December '00 is likely to affect the growth in interest income of BOB in the 4QFY01. This will also depress the operating margins of the bank. Nevertheless, for the full year OPM are projected to move up by about 30 basis points.
During the year, BOB also launched a VRS and received application from over 6,700 employees. The scheme is likely to cost Rs 7 bn to the bank. If the bank plans to write off some part of these expenses in FY01, profits may decline. However, its cost to income ratio, which was 55.3% in FY00, will decline significantly from the fiscal year 2002.
At the current market price of Rs 55, BOB is trading at a P/E of 3x and Price to Book value ratio of 0.5x. In the past three years, the stock's P/E moved in the range of 5-11 times. Although BOB's productivity ratios are comparable to its peers, the bank's slow move towards adoption of technology is affecting its valuations.
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