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Bank of Baroda: Sees higher NPA provisioning

Jul 30, 2012

Bank of Baroda (BOB) declared its results for the first quarter of financial year 2012-2013 (1QFY13). The bank has reported 29% YoY and 10% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 22% YoY in 1QFY13, on the back of 23% YoY growth in advances.
  • Other income grows by a 20% YoY in 1QFY13.
  • Despite domestic yields on advances rising, global NIMs were sustained at 2.7% in 1QFY13.
  • Net NPAs move up marginally from 0.44% in 1QFY12 to 0.65% in 1QFY13.
  • Net profit up 10% YoY in 1QFY13; provisions on non performing advances eat into the profits.
  • Capital adequacy ratio comfortable at 13.7% at the end of 1QFY13, with Tier 1 capital at over 10%.

Rs (m) 1QFY12 1QFY13 Change
Interest income 66,318 85,576 29.0%
Interest expense 43,346 57,595 32.9%
Net Interest Income 22,972 27,981 21.8%
Net interest margin (%) 2.9% 2.7%  
Other Income 6,409 7,708 20.3%
Other Expense 11,068 13,157 18.9%
Provisions and contingencies 3,911 8,938 128.6%
Exceptional item* 130 124 -4.4%
Profit before tax 14,272 13,469 -5.6%
Tax 3,944 2,081 -47.2%
Effective tax rate 27.6% 15.4%  
Profit after tax/ (loss) 10,329 11,389 10.3%
Net profit margin (%) 15.6% 13.3%  
No. of shares (m)   411.1  
Book value per share (Rs)*   678.4  
P/BV (x)   1.0  
* (Book value as on 30th June 2012)
*Charge on taking over the assets & liabilities of Memon Co-operative Bank

What has driven performance in 1QFY13?
  • Bank of Baroda (BOB) saw a dip in its net interest margins (NIMs) during the 1QFY13 compared to the previous year as there was some interest on income tax refunds recorded earlier. With 31% of its advances in overseas markets BOB grew its advance book by 23% YoY in 1QFY13. While the overseas book grew at a faster clip (mainly on account of rupee depreciation), the domestic advances growth grew in line with the sector average. Even though domestic yields increased, costs also grew in tandem, thus the bank was able to maintain its NIMs at 2.7%. The management has a guidance of a 3.2% NIM for FY13. The proportion of low cost deposits (CASA) in the domestic portfolio came in lower at 26% of total deposits in 1QFY13 (28% in 1QFY12). 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. However, compared to other banks, growth has been decent.

    Overseas and SME drive advance growth
    (Rs m) 1QFY12 % of total 1QFY13 % of total Change
    Advances 2,323,400   2,858,130   23.0%
    Domestic 1,686,210   1,959,860   16.2%
    % of total 73%   69%    
    Retail 309,340 13.3% 329,220 11.5% 6.4%
    Home Loans 129,100 5.6% 145,200 5.1% 12.5%
    SME 283,670 12.2% 343,460 12.0% 21.1%
    Overseas 637,190 27.4% 898,270 31.4% 41.0%
    Deposits 3,129,430   3,827,390   22.3%
    Domestic 2,365,360   2,778,390   17.5%
    % of total 76%   73%    
    CASA 872,210 27.9% 997,760 26.1% 14.4%
    Tem deposits 1,493,150 47.7% 1,780,630 46.5% 19.3%
    Overseas 764,070 24.4% 1,048,990 27.4% 37.3%
    Credit deposit ratio 74.2%   74.7%    

  • BOB grew its fee income by a very muted 4% YoY in 1QFY13 on account of a benign growth in commission, exchange and brokerage. The bank saw robust profits from exchange transactions and through recoveries from written off accounts. However, the muted growth in fee income was compensated on other fronts. As a result, other income grew by 20% YoY in 1QFY13.

  • The bank's cost to income ratio remained declined to around 37% for the global operations in 1QFY13. For the overseas operations it stood at 17.8% in 1QFY13, showing the operating efficiency of the bank.

  • The net NPAs went up marginally from 0.44% of total advances in 1QFY12 to 0.65% in 1QFY13. However, the bank maintained sufficient provision coverage of 87% in 1QFY13. Gross NPAs for domestic operations were higher at 2.6% as against 0.7% for overseas operations in 1QFY13. The bank saw higher gross NPAs as a proportion of the book in the agri portfolio and its small scale industries and MSME accounts.

  • Further, the bank saw an increase in its restructured accounts. Loans worth Rs 7.7 bn were restructured in 1QFY13. This is much below the restructuring seen in the 4QFY12 (Rs 53 bn) where a number of large chunky accounts were restructured. Moreover the management also sounded confident with very few accounts in restructuring pipeline.

  • BOB's overseas business contributed 29% of the bank's total business, 23.7% of the gross profits and 36% of the core fee based income in 1QFY13.

  • The bank's proposed plan is to hire another 3,400 employees in FY13. In FY13, the bank plans to open 572 branches.

What to expect?
At the current price of Rs 673, the stock is valued at 0.8 times our estimated FY15 adjusted book value. The bank has shown a robust performance on the operating front despite a tough macro-economic environment, especially on the NII front and even growth in other income was robust. 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. It has seen a broad based expansion in the loan book and has strategically gone slow on certain accounts like retail etc. The bank expects to grow ahead of the sector in FY13 as well, and has seen strong growth so far this year. The moderation in restructured assets is a comfort, as most of the large chunky have been taken care of now, and the restructuring pipeline is small. The bank reiterated its target of growing ahead of the industry average, despite the challenging environment and improving its NIMs. We continue to maintain our positive BUY view on the stock on account of its reasonable valuations, and the fact that it continues to outperform the sector.

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