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Bank of Baroda: Asset quality worsens
Aug 1, 2013

Bank of Baroda (BOB) declared its results for the first quarter of financial year 2013-2014 (1QFY14). The bank has reported 3.3% YoY growth in net interest income and a 2.5% increase in net profits for the quarter. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 3.3% YoY in 1QFY14, on the back of 12.4% YoY growth in advances.
  • Other income grows by whopping 59.6% YoY in 1QFY14 owing to robust trading gains.
  • Global NIMs moved down to 2.4% in 1QFY14 from 2.7% in 1QFY13 due to increased interest costs.
  • Operating costs spike up by 26.8% YoY on account of wage-related provisions.
  • Net NPAs move up sharply from 0.65% in 1QFY13 to 1.69% in 1QFY14.
  • Net profit grew 2.5% YoY in 1QFY14 on the back of poor interest income performance, and increased operating and tax expenses for the quarter.
  • Capital adequacy ratio stands at 12.7% at the end of 1QFY14. Tier I ratio stands at 9.7%.

Rs (m) 1QFY13 1QFY14 Change
Interest income 85,576 94,869 10.9%
Interest expense 57,595 65,978 14.6%
Net Interest Income 27,981 28,891 3.3%
Net interest margin (%) 2.7% 2.4%  
Other Income 7,708 12,306 59.6%
Other Expense 13,157 16,680 26.8%
Provisions and contingencies 8,938 10,179 13.9%
Exceptional item* 124 156 25.0%
Profit before tax 13,469 14,182 5.3%
Tax 2,081 2,503 20.3%
Effective tax rate 15.4% 17.7%  
Profit after tax/ (loss) 11,389 11,679 2.5%
Net profit margin (%) 13.3% 12.3%  
No. of shares (m)   422.5  
Book value per share (Rs)*   773.8  
P/BV (x)   0.6  
* (Book value as on 30th June 2013)
What has driven performance in 1QFY14?
  • While the business growth for BoB during the first quarter of the new fiscal appeared to be decent, the overall earnings performance was disappointing. Robust other income during the quarter saved the grace. Else, the profitability would have shrunk and reported de-growth. Moreover, the surge in bad loans added further to the misery for BoB.

  • Coming to the business growth, advances grew by 12.4% YoY and deposits grew by 22.0% YoY during 1QFY14. The domestic loan growth has clearly moderated on account of cautious lending. While the farm credit declined by 2.3% YoY, the retail loan growth was reported at 16% YoY. The corporate loan portfolio grew by mere 3.0% during the quarter. The bank continues to focus on retail lending. MSME portfolio that grew by strong 37.0% YoY proved to be the growth-engine driving the loan growth for the quarter.

    Overseas book drive advance growth
    (Rs m) 1QFY13 % of total 1QFY14 % of total Change
    Advances 2,858,130   3,213,140   12.4%
    Retail 329,220 11.5% 381,910 11.9% 16.0%
    Overseas 898,270 31.4% 1,038,910 32.3% 15.7%
    Deposits 3,827,390   4,670,260   22.0%
    CASA* 895,510 23.4% 1,457,121 31.2% 62.7%
    Tem deposits 1,905,840 49.8% 3,213,139 68.8% 68.6%
    Overseas 1,047,360 27.4% 1,321,780 28.3% 26.2%
    Credit deposit ratio 74.7%   68.8%    
    *Only domestic CASA has been included here

  • Deposits, on the other hand, outpaced the credit growth reporting 22.0% YoY growth during the quarter. The CASA as a percentage share of total deposits improved marginally on sequential basis, but has witnessed decline on annual basis. Thus for the quarter ended June 2013, CASA was reported at 31.2% that came down from 32.2% same quarter a year ago. But the ratio marginally improved from 30.4% levels reported in 4QFY13. Nonetheless, the bank shed the high-cost deposit base during the quarter. The share of preferential deposits came down to Rs 80 bn during 1QFY14 from higher levels of Rs 500 bn in the corresponding quarter a year ago.

  • The decent loan growth failed to translate into healthy net interest income (NII) performance for the bank on account of increased interest costs during the quarter. The Net interest income grew by mere 3.3% YoY in 1QFY14. The management hopes to recover the NII growth at desirable levels starting 2QFY14 boosted by both the loan yields and the investment yields. The margins, however, declined sharply to 2.4% from 2.7% a year ago. Going ahead, given the uncertainty, the domestic margins are expected to be under pressure whereas margins on the overseas book may continue to improve on account of churning in international portfolio.

  • Going with the trend observed since last few quarters, the Bank's Overseas Business continued to remain a major support to its Overall Business and posted a growth of 27.7% YoY. During 1QFY14, the Overseas Operations contributed 31.5% to the Bank's Global Business, 22.2% to its Gross Profit and 33.3% to its Core Fee Income.

  • The other income performance stood out particularly encouraging during the quarter for BoB. Other income grew by whopping 59.6% YoY driven primarily by the whopping treasury gains recorded during the quarter. Going ahead, the treasury portfolio may be impacted due to MTM losses and as a result the coming quarters may not replicate strong performance as witnessed in 1QFY14.

  • The 26.8% YoY increase in operating costs also turned out to be another deterrent to the profitability of the bank. Higher provisions pertaining to AS-15 requirements and wage-hike led to sharp increase in employee expenses during the quarter. Consequently, the cost-income ratio spiked up to 40% levels during 1Q of FY14 from 37% same quarter a year ago.

  • The last few quarters have proved troublesome for BoB in terms of asset quality. The first quarter of this fiscal witnessed further worsening of assets. Given the continued weakness in economic activity, Gross NPAs spiked dramatically from 1.84% in 1QFY13 to 2.99% in 1QFY14. Net NPAs have moved up sharply from 0.65% in 1QFY13 to 1.69% in 1QFY14. The concerns exacerbated with fresh slippages that have been reported at Rs 19 bn and a restructured pipeline to the tune of Rs 20 bn. Though recoveries that were expected to be buoyant were reported at Rs 3.4 bn during the quarter witnessed improvement on annual basis, they were not on expected lines. While the management expects the 2HFY14 to be the beginning of the improvement cycle, the continued economic downturn, few risky exposures, restructured pipeline and subdued loan growth may not allow the asset quality to improve remarkably. The bad loans may continue at elevated levels and on the conservative side, we build in higher NPAs into our calculations.

  • The provisions were not in commensurate with the higher NPAs reported during the quarter. Therefore, the provision coverage stood at 63.6% as at the end of June quarter that was lower than the healthy levels of 79.0% reported same quarter previous year. Historically, BoB have boasted strong provision coverage ratios owing to their resilient balance sheet. However, presently the book stands vulnerable to the macro headwinds and the next couple of quarters may continue to consume Management's time in cleaning up exercise.

  • From higher levels of 16-17% RoEs a year ago, the bank has reported a weaker number in the first quarter at 14.3%. Clearly, poor earnings on account of lingering bad assets have taken a toll on the bank's performance. Additionally at 9% Tier I and 12% total capital adequacy, the bank will have to raise capital in near future to fulfill the stringent BASEL III requirements. This implies further compression in return ratios.

What to expect?

At the current price of Rs 529, the stock is valued at 0.6 times our estimated FY15 adjusted book value.

The past few quarters have been particularly challenging for the bank. BoB continues to witness deterioration in asset quality since more than a year now. Moreover, the growth for BoB during the first quarter came at a cost of asset quality. The absolute Gross NPAs YoY have spiked as high as 83.5% during the first quarter. Slippages and restructuring stands particularly worrying with no commensurate increase in recoveries and up-gradations.

The overseas business growth did prove as a savior but this also witnessed deterioration in asset quality during the quarter.

While we do find BOB's business model to be most resilient as compared to other large PSU banks, that the NPAs risks will continue to surface in the near term is undeniable. In this backdrop, we reiterate our HOLD view on the stock. We would recommend investors to not buy the stock at current levels despite the attractive valuations. Please ensure that no single stock forms more than 3-5% of your overall portfolio.

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