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Bank of Baroda: Lower provisions drive 1Q profits - Views on News from Equitymaster
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Bank of Baroda: Lower provisions drive 1Q profits
Aug 6, 2014

Bank of Baroda (BOB) declared its results for the first quarter of financial year 2014-2015 (1QFY15). The bank has reported 15.2% YoY growth in net interest income and 16.6% increase in net profits for the quarter. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 15.2% YoY in 1QFY15, on the back of healthy 18.8% YoY growth in advances.
  • Other income declines by 16.7% YoY in 1QFY15 owing to severe dip in trading gains.
  • Global NIMs remain stable at 2.4% in 1QFY15 from 2.7% in 1QFY13 due to marginal decrease in interest costs.
  • Operating costs spike up by 12.3% YoY, cost-income ratio has moved up to 43% from 40% a year ago.
  • While the gross NPAs have gone up from 2.99% (1QFY14) to 3.11% (1QFY15), the Net NPAs were down from 0.69% in 1QFY14 to 1.58% in 1QFY15.
  • Net profit grows 16.6% YoY in 1QFY15 on the back of healthy interest income performance, and lower provisions reported during the quarter.
  • Capital adequacy ratio stands at 12.5% at the end of 1QFY15. Tier I ratio stands at 9.3%.

Financial Performance Snapshot
Rs (m) 1QFY14 1QFY15 Change
Interest income 94,869 106,580 12.3%
Interest expense 65,978 73,297 11.1%
Net Interest Income 28,891 33,283 15.2%
Net interest margin (%) 2.4% 2.4%  
Other Income 12,306 10,246 -16.7%
Other Expense 16,680 18,733 12.3%
Provisions and contingencies 10,179 5,267 -48.3%
Exceptional item* 156 0 -100.0%
Profit before tax 14,182 19,529 37.7%
Tax 2,503 5,910 136.1%
Effective tax rate 17.7% 30.3%  
Profit after tax/ (loss) 11,679 13,619 16.6%
Net profit margin (%) 12.3% 12.8%  
No. of shares (m)   430.7  
Book value per share (Rs)*   847.0  
P/BV (x)   1.1  
* (Book value as on 30th June 2014)
*Charge on taking over the Assets & Liabilities of Memon Co-operative Bank

What has driven performance in 1QFY15?
  • The bank began the FY15 fiscal on a mixed note with business growth showing up well; albeit bad loan worries are still not behind. Defying the macro economic challenges, the top-line stood stronger vis-a-vis the previous quarter and also on the annual basis. Not only the business growth for BoB during the first quarter of the new fiscal appeared to be decent, but the overall earnings performance too stood quite encouraging. Lower provisions have boosted the profitability for the quarter. Notably, the asset quality woes continue to persist for the bank as fresh additions to bad loans have remained on the higher side.

  • Coming to the business growth (18.4% YoY), both advances and deposits grew by over 18% YoY, putting forth a strong show for the first quarter of FY15. The domestic loan growth has grown by sturdy 20.4% YoY. Most of the credit lines have grown at a boisterous pace, with SME and the retail loan book reporting growth of 22% and 17% YoY respectively. The bank continues to lay emphasis on retail lending. All-in-all we are enthused by the fact that the domestic book stood stronger than the overseas lending.

    Domestic book stood stronger
    (Rs m) 1QFY14 % of total 1QFY15 % of total Change
    Advances 3,213,140   3,817,723   18.8%
    Domestic 2,155,510   2,594,820   20.4%
    % of total 67%   68%    
    Retail 380,020 11.8% 445,450 11.7% 17.2%
    Home Loans 165,240 5.1% 201,680 5.3% 22.1%
    SME 470,680 14.6% 574,330 15.0% 22.0%
    Overseas 1,057,630 32.9% 1,222,910 32.0% 15.6%
               
    Deposits 4,670,257   5,516,491   18.1%
    Domestic 3,242,210   3,654,130   12.7%
    % of total 69%   66%    
    CASA* 1,010,570 21.6% 1,144,780 20.8% 13.3%
    Tem deposits 2,231,640 47.8% 4,371,711 79.2% 95.9%
    Overseas 171,420 3.7% 241,540 4.4% 40.9%
    Credit deposit ratio 68.8%   69.2%    
    *Only domestic CASA has been included here

  • Deposits too have grown at a similar pace as advances during the quarter. The CASA as a percentage share of total deposits stood steady at 31%. The term deposits have grown exponentially, the CASA share therefore has remained muted. That said, the bank's rich liability franchise continues to support CASA and margins expansion.

  • The healthy loan growth did translate into decent net interest income (NII) performance for the bank that reported 15.2% YoY growth during the quarter. The margins, however, have not observed any uptick and have remained at 2.4% levels. That's because the overseas margins have plunged down. However, the domestic NIMs at 2.9% stood higher than 2.8% a year ago. Going forward, the bank would continue to maintain margins at current levels, thanks to the rich liability franchise.

  • The Bank's overseas operations continue to drive the total business growth. During 1QFY15, the Overseas Operations contributed 33.1% to the Bank's total business, 25.8% to its Gross Profit and 29.5% to its Core Fee Income.

  • The other income performance stood discouraging during the quarter with trading gains observing a downturn.

  • The operating costs were up by 12.3% YoY as at the end of 30th June 2014. Consequently, the cost-income ratio spiked up to 43% levels during 1Q of FY15 from 40% same quarter a year ago.

  • The bank continues to realm under the asset quality pressures as the fresh slippages continue to remain on the higher side. While the slippages had witnessed decline for past three consecutive quarters, they stood at Rs 18.8 bn during 1QFY15. While the gross NPAs have gone up from 2.99% (1QFY14) to 3.11% (1QFY15), the Net NPAs were down from 0.69% in 1QFY14 to 1.58% in 1QFY15. Higher NPAs have emerged from the large and medium industries, micro, small and medium enterprise and the agriculture segments. The outstanding restructured assets as percentage of total advances remained elevated at 6% during the first quarter. The management has guided for a restructuring pipeline of Rs 10 bn for the September quarter.

  • For the quarter ended June 2014, the provisions were seen down by staggering 48.3%. This was on account of a size-able write back on investment depreciation helped by buoyant equity markets. Provisions against bad loans however have stood higher during the quarter. The bank increased its provision coverage ratio to 66.68% from 65.5% a year ago.

  • The bank has reported RoEs at 14.9% levels during 1QFY14, and remains at similar levels as the year before. Asset quality continues to weigh down the earnings and as a result the return ratios of the bank.
What to expect?
At the current price of Rs 892, the stock is valued at 0.8 times our estimated FY17 adjusted book value.

The past few quarters have been particularly challenging for the bank. BoB continues to witness deterioration in asset quality since two years now. Re-balancing of loan book has been yielding desirable results for BOB. The bank's effort to curtail its slippages thereby paving way for healthy asset quality bodes well for its return ratios and valuations. That the bank is getting closer to recovery is true, but we maintain a conservative stance given the macro challenge

The first quarter of FY14 turned out to be mixed with healthy top-line as well as bottom-line growth; albeit higher slippages. Had it not been for lower provisions, the profitability would have stood weaker during the quarter.

In this backdrop, we reiterate SELL recommendation on the stock and do not recommend to buy any more at current levels.

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