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BOB: Another restructuring story

Jul 4, 2001

Bank of Baroda (BOB) became one more public sector bank to announce subdued fourth quarter performance hit by a slowdown in the industrial activity, and its own restructuring exercise. The bank’s interest income in 4QFY01 grew by a marginal 3% and bottomline turned red (loss of Rs 1.5 bn). The fall was primarily due to write off of Rs 3.2 bn on account of NPAs and Rs 1.8 bn for VRS cost.

Net NPA ratio of the bank declined to 6.8% in FY01 from 7% in FY00. Net NPAs after reducing cumulative provision however increased by 9.8% (growth of 34% in gross NPAs). During the year, BOB made cash recoveries of over Rs 4 bn. An 87% jump in NPA provision was mainly due to change in recognition norms (if the interest is not received within 90 days the asset will be classified as NPA, as against the earlier 180 days norm). Gross NPAs are expected to go up by further 19% in FY02 due to revised classification norms.

In FY01, 6,700 employees of the bank took VRS and the scheme cost the bank Rs 8.5 bn (Rs 1.3 m per employee). The bank has charged Rs 1.7 bn in the current year and the balance amount will be written off over a period of five years. Staff cost accounted for 68% of total operating cost in FY01. With reduction in number of employees, cost to income ratio is expected to come down to about 50% in FY02 (54% in FY01). Apart from this it will also improve the efficiency level of the bank in future.

BOB’s interest spread management was satisfactory. While its cost of deposits declined by 23 basis points, its yield on advances fell more than proportionately by 37 basis points. This has resulted in a decline in interest spread of the bank to 3.9% from 4% in FY00. Nevertheless, it is one of the best in the industry. The deposit growth in FY01 was a marginal 5.3%, due to sluggish growth in the current and term deposits. BOB aims to reduce the proportion of term deposits (currently accounts for 67% of total deposits) to bring down the cost of funds. If the bank is able to do so, it will be positive considering the falling interest rate scenario.

Investments of the bank grew by just 7% in FY01 compared to over 15% growth in the last two years. The growth rate was also low compared to 12% rise in advances. The pattern was similar on the revenue side. While the interest income from advances increased by 13%, investment income was up by just 8%. In the current scenario of weakening industrial activity, the lending opportunities available in the market is limited and also risky. This is due to the fact that the ‘AAA’ rated corporate clients are borrowing from the markets (through bonds) at comparatively low rates. Lending to second rung companies could only inflate the NPA level. As a result the bank is diversifying into retail lending which accounted for a marginal 4.2% of total advances in FY01 (growth of over 100%).

Apart from the topline growth, the fee-based income of BOB is also displaying subdued growth rates. The bank’s forex business (turnover of Rs 1,500 bn), which accounted for 19% to other income, witnessed a huge decline of 22% in FY01. This clearly indicates tough time for the bank going forward with the increasing competition from private banks and financial institutions. The proportion of other income as a % to total income also declined to 10.9% from 11.6% in the previous year. The bank is one of the key players in commercial paper market with turnover of Rs 15 bn and turnover of Rs 14 bn in CMS (300 accounts).

Other income break-up
(Rs m) FY00 FY01 Change
Commission and exchange 2,803 2,977 6.2%
Sale of sec. 857 1,020 19.0%
Forex 1,728 1,344 -22.2%
Other income 1,439 1,723 19.7%
Total 6,827 7,064 3.5%

BOB is initiating measures to improve the business efficiency by implementing technology plans. The bank has appointed Gartner, world-renowned IT consulting firm for the purpose. It has already networked 250 branches and plans to connect all (total 2,600 branches) in another 12-18 months. BOB spent Rs 1 bn towards implementing IT solutions and aims to invest another Rs 3 bn in the next two years.

Level of computerization
BOB 75%
Corporation Bank 80%
SBI 74%
HDFC Bank 100%
ICICI Bank 100%

Among the other developments, BOB is focusing on becoming a universal bank. Life insurance is another area where the bank is looking at and has already made applications to that end. It plans to foray into term loans, asset management, card business, capital market advisory services and primary dealer (PD) business (debt markets). It has already received approval to start PD business. The bank has also obtained license to open a branch in Malaysia and is looking to open branches in the US (specifically in California and Texas).

BOB’s initiatives in upgrading technology, diversifying into other business areas, improving the asset quality and efficiency level are steps in the correct direction. This will lead to a growth of over 50% in profits of FY02. However, the bank still needs to improve the customer service in line with the private sector banks to maintain a double-digit growth in business.

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