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Bank of Baroda: Fees take centrestage - Views on News from Equitymaster
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Bank of Baroda: Fees take centrestage
Jul 29, 2008

Performance summary
  • Interest income grows by 26.7% YoY in 1QFY09, on the back of 42% YoY growth in advances.
  • Fee income grows by 44.5% YoY.
  • Net interest margins drop to 2.8% in 1QFY09 (3.1% in 1QFY08).
  • Overseas business contributed to 31% of net profit.
  • Cash recoveries being commensurate with incremental slippages - saves NPA blushes.
  • Farm loan relief Rs 1.4 bn, interest charge reversed Rs 69 m.

Rs (m) 1QFY08 1QFY09 Change
Interest income 26,004 32,938 26.7%
Interest Expense 16,961 22,368 31.9%
Net Interest Income 9,043 10,570 16.9%
NIM (%) 3.1% 2.8%  
Other Income 4,244 5,126 20.8%
Other Expense 6,843 7,094 3.7%
Provisions and contingencies 1,414 2,803 98.2%
Profit before tax 5,030 5,799 15.3%
Tax 1,722 2,090 21.4%
Profit after tax / (loss) 3,308 3,709 12.1%
Net profit margin (%) 12.7% 11.3%  
No. of shares (m) 365.5 365.5  
Book value per share (Rs)*   271.9  
P/BV (x)   0.8  
* (Book value as on 30th June 2008)

What has driven performance in 1QFY09?
  • Overseas growth going strong: Bank of Baroda (BoB) clocked a sterling 42.1% YoY growth in advances in 1QFY09, at a time when the average sector growth is nearly half that figure. The growth in low cost overseas deposits was, however, higher than the domestic deposits as the bank increased the proportion of overseas 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 21%. Further, the bank hopes to sustain the level of NIM at 3.0% in FY09 (2.8% in 1QFY09) by passing on the rate hike on incremental advances. Overseas business takes lead

      1QFY08 % of total 1QFY09 % of total Change
    Advances 782,646   1,112,140   42.1%
    Domestic 628,306   853,190   35.8%
    % of total 80%   77%    
    Agriculture 104,802 13.4% 137,290 16.1% 31.0%
    Retail 142,323 18.2% 169,080 15.2% 18.8%
    SME 101,146 12.9% 120,870 10.9% 19.5%
    Overseas 154,340   258,950   67.8%
    Deposits 1,224,569   1,549,080   26.5%
    Domestic 940,336   1,177,301   25.2%
    % of total 77%   76%    
    CASA 362,970 38.6% 434,424 36.9% 19.7%
    Term deposits 577,366 61.4% 742,877 63.1% 28.7%
    Overseas 271,174   371,779   37.1%

  • Fees in focus: After having stagnancy in its fee revenues over several quarters, BOB seems to have finally drawn focus on this counter to shield its profits from getting eroded by the lower NIMs and treasury losses. Fee income backed by growth in commissions and forex income grew by 44.5% to form 10% of total income at the end of 1QFY09. The bank currently has 68.3% of investments in the HTM basket.

  • The bank’s cost to income ratio dropped from 52% in 1QFY08 to 45% in 1QFY09 due to the implementation of core banking solution at 94% of branches and natural attrition.

  • Retail sees red: 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 0.7% of total advances in 1QFY08 to 0.5% in 1QFY09. More importantly, the growth in cash recoveries substantially reduced the provisioning requirement for the bank in 1QFY09. The NPA coverage ratio stood at a comfortable 72.5% at the end of 1QFY09. Gross NPAs in the retail portfolio, however, moved up substantially.

    Where the risk lies…
    Gross NPAs (%) 1QFY08 1QFY09
    Agriculture 3.8 3.2
    Large industries 3.2 1.2
    Retail advances 2.4 3.5
    SME N.A 3.3
    Overseas advances 0.6 0.6
    Domestic advances 2.2 1.9

    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 (3.2% in 1QFY09) remains a peril.

What to expect?
At the current price of Rs 227, the stock is valued at 0.6 times our estimated FY11 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 and exposure in overseas markets that hedged its net interest margins makes it a de-risked play in the PSU banking space.

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Feb 22, 2018 01:23 PM


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