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Bank of Baroda: Treasury dampener - Views on News from Equitymaster

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Bank of Baroda: Treasury dampener

Aug 9, 2010

Bank of Baroda declared its 1QFY11 results. The bank has reported 54% YoY growth in net interest income while net profits have grown by 25% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 54% YoY in 1QFY11, on the back of 31% YoY growth in advances.
  • Other income falls by 12% YoY backed by marginal growth in fees and fall in treasury income.
  • Despite yields on overseas assets remaining substantially low, global NIMs move up from 2.4% in 1QFY10 to 2.9% in 1QFY11.
  • Net NPAs move up from 0.3% in 1QFY10 to 0. 4% in 1QFY11.
  • Capital adequacy ratio comfortable at 13.3% at the end of 1QFY11.

Rs (m) 1QFY10 1QFY11 Change
Interest income    40,321      47,269 17.2%
Interest Expense    28,274      28,689 1.5%
Net Interest Income    12,047      18,580 54.2%
NIM (%) 2.4% 2.9%  
Other Income      7,030         6,172 -12.2%
Other Expense      8,978         9,474 5.5%
Provisions and contingencies        (389)         2,513  
Profit before tax    10,488      12,765 21.7%
Tax      3,635         4,174 14.8%
Profit after tax / (loss)      6,853         8,591 25.4%
Net profit margin (%) 17.0% 18.2%  
No. of shares (m) 365.5  
Book value per share (Rs)*   402.0  
P/BV (x)   1.9  
* (Book value as on 30th June 2010)

What has driven performance in 1QFY11?
  • With 27% of its advances in overseas markets Bank of Baroda grew its advance book by 31% in 1QFY11. While the overseas book grew at a faster clip, the domestic advances growth also outperformed the sector average. Despite the pressure on overseas interest rates, the bank's margins (NIMs) improved from 2.4% in 1QFY10 to 2.9% in 1QFY11 due to re-pricing of domestic assets. The growth in overseas loan book although higher than the domestic book was not equally profitable due to excessive pressure on yields. The proportion of low cost deposits in the domestic portfolio remained stable at 35% of total deposits in 1QFY11.

    Overseas book leads growth
      1QFY10 % of total 1QFY11 % of total Change
    Advances 1,420,060   1,855,940   30.7%
    Domestic 1,058,970   1,357,120   28.2%
    % of total 75%   73%    
    Agriculture 179,140 12.6% 210,890 15.5% 17.7%
    Retail 202,210 14.2% 249,940 13.5% 23.6%
    SME 151,360 10.7% 215,930 11.6% 42.7%
    Overseas 361,090   498,820   38.1%
    Deposits 1,954,230   2,519,280   28.9%
    Domestic 1,544,350   1,961,660   27.0%
    % of total 79%   78%    
    CASA 541,970 35.1% 691,140 35.2% 27.5%
    Term deposits 441,750 28.6% 585,020 29.8% 32.4%
    Overseas 409,880   557,620   36.0%

  • BOB failed to make any improvement in its fee income stream with the same remaining flat year on year. The fees failed to shield the poor performance of the bank's trading portfolio in 1QFY11 due to upward movement of interest rates. This led to 12% YoY drop in other income at the end of 1QFY11.

  • The bank's cost to income ratio declined from 47% to 41% for the domestic operations in 1QFY11. For the overseas operations it stood at 20% in 1QFY11.

  • The net NPAs went up marginally from 0.3% of total advances in 1QFY10 to 0.4% in 1QFY11. However, sufficient provision coverage of 73% substantially reduced the provisioning requirement for the bank in 1QFY11. Gross NPAs for domestic operations were higher at 1.7% as against 0.6% for overseas operations in 1QFY11.

  • BOB's overseas business contributed 25% of the bank's total business, 16% of profits and 27% of the fee based income in 1QFY11.

What to expect?
At the current price of Rs 769, the stock is valued at 1.1 times our estimated FY13 adjusted book value (ResearchPro subscribers can view latest updates here). The bank has marginally outperformed our broad asset growth and margin estimations. While we draw comfort from the bank's adequate capital and provisioning cover, the low fee income proportion and incremental slippages are our concerns with regard to the bank. We maintain our positive view on the stock.

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