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Bank of Baroda: Sees a dip in treasury income

Jul 28, 2011

Bank of Baroda (BOB) declared its results for the first quarter of financial year 2011-2012 (1QFY12). The bank has reported 40% YoY and 20% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 24% YoY in 1QFY12, on the back of 25% YoY growth in advances.
  • Other income grows by a marginal 4% YoY in 1QFY12 due to fall in treasury income.
  • Despite domestic yields on advances rising, global NIMs were sustained at 2.9% in 1QFY12.
  • Net NPAs move up marginally from 0.39% in 1QFY11 to 0.44% in 1QFY12.
  • Net profit up 20% YoY in 1QFY12; provisions on advances eat into the profits.
  • Capital adequacy ratio comfortable at 13.1% at the end of 1QFY12.

Rs (m) 1QFY11 1QFY12 Change
Interest income 47,270 66,318 40.3%
Interest expense 28,690 43,346 51.1%
Net Interest Income 18,580 22,972 23.6%
Net interest margin (%) 2.9% 2.9%  
Other Income 6,172 6,409 3.8%
Other Expense 9,474 11,068 16.8%
Provisions and contingencies 2,513 3,911 55.6%
Exceptional item*   130  
Profit before tax 12,765 14,272 11.8%
Tax 4,174 3,944  
Effective tax rate 32.7% 27.6%  
Profit after tax/ (loss) 8,592 10,329 20.2%
Net profit margin (%) 18.2% 15.6%  
No. of shares (m)   391.5  
Book value per share (Rs)*   530.9  
P/BV (x)   1.6  
* (Book value as on 30th June 2011)
*Charge on taking over the assets & liabilities of Memon Co-operative Bank

What has driven performance in 1QFY12?
  • Bank of Baroda (BOB) was able to sustain its net interest margins (NIMs) during the 1QFY12. The bank consciously decided to shed its exposure to high cost bulk deposits. With 27% of its advances in overseas markets BOB grew its advance book by 25% YoY in 1QFY12. While the overseas book grew at a faster clip, the domestic advances growth also outperformed the sector average. Even though domestic yields increased, the bank was able to maintain its NIMs at 2.9%. This was slightly lower that the 3.1% NIMs seen at the end of FY11. The proportion of low cost deposits (CASA) in the domestic portfolio came in marginally lower at 28% of total deposits in 1QFY12 (29% in 1QFY11). CASA growth however slowed down to some extent, as customers preferred to opt for term deposits, on account of the higher prevailing interest rates in India.
  • Overseas and SME drive advance growth
    (Rs m) 1QFY11 % of total 1QFY12 % of total Change
    Advances 1,855,950   2,323,400   25.2%
    Domestic 1,357,120   1,686,210   24.2%
    % of total 73%   73%    
    Retail 249,940 13.5% 309,340 13.3% 23.8%
    Home Loans 107,790 5.8% 129,100 5.6% 19.8%
    SME 215,930 11.6% 283,670 12.2% 31.4%
    Overseas 498,820 26.9% 637,190 27.4% 27.7%
    Deposits 2,546,680   3,129,430   22.9%
    Domestic 1,961,660   2,365,360   20.6%
    % of total 77%   76%    
    CASA 747,840 29.4% 872,210 27.9% 16.6%
    Tem deposits 1,213,820 47.7% 1,493,150 47.7% 23.0%
    Overseas 585,020 23.0% 764,070 24.4% 30.6%
    Credit deposit ratio 72.9%   74.2%    

  • BOB grew its fee income by 28% YoY in 1QFY12. However, the robust growth in fee income failed to shield the poor performance of the bank's trading portfolio in 1QFY12 on account of an upward movement in interest rates. Treasury yields hardened, and even the equity markets performance was lackluster, impacting trading gains. As a result, for the twelve month period, other income grew by only 4% YoY.

  • The bank's cost to income ratio remained constant at around 38% for the global operations in 1QFY12. For the overseas operations it stood at 18% in FY11, showing the operating efficiency of the bank.

  • The net NPAs went up marginally from 0.39% of total advances in 1QFY11 to 0.44% in 1QFY12. However, the bank maintained sufficient provision coverage of 82.5% in 1QFY12. Gross NPAs for domestic operations were higher at 1.8% as against 0.6% for overseas operations in 1QFY12. The company was able to maintain its asset quality even in a rising interest rate environment due to its diversified loan book. It only has a 6-7% exposure to the power sector and its NPAs in the retail, especially the housing segment has seen a fall.

  • BOB's overseas business contributed 26% of the bank's total business, 19% of the gross profits and 36% of the fee based income in 1QFY12.

  • The bank reiterates its plan to hire another 4,000 employees in FY12. In FY12, the bank plans to open 269 branches in Tier-1 & Tier-2 cities and 253 branches in smaller Tier-3 to Tier-6 cities.

What to expect?
At the current price of Rs 870, the stock is valued at 1 times our estimated FY14 adjusted book value. The bank has shown a robust performance despite a tough macro-economic environment. On account of its extensive presence overseas, BOB has greater headroom to absorb higher cost of funds. The bank has seen a strong growth in its overseas loan book as well as from the small and medium enterprises (SME) space. The robust growth from SMEs has mainly come from the services space, as the manufacturing sector has been affected by the slowdown. The bank reiterated its target of growing at around 24-25%, ahead of the industry average. However, we have been slightly conservative in our estimates. We continue to maintain our positive view on the stock on account of its reasonable valuations, and the fact that it continues to outperform the sector, and maintain superior asset quality.

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