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Bank of Baroda: Growth at cost of margins
Aug 10, 2009

Performance summary
  • Interest income grows by 22% YoY in 1QFY10, on the back of 28% YoY growth in advances.
  • Other income grows by 37% YoY backed by treasury gains.
  • Net interest margins lower at 2.6% for domestic operation (2.9% in 1QFY09) and 1.5% for overseas operations (1.8% in 1QFY09) at the end of 1QFY10.
  • Net NPAs decline from 0.5% in 1QFY09 to 0.3% in 1QFY10.
  • Capital adequacy ratio very comfortable at 14.6% (as per Basel II) at the end of 1QFY10.


Bank of Baroda: Growth at cost of margins
Rs (m) 1QFY09 1QFY10 Change
Interest income 32,938 40,321 22.4%
Interest Expense 22,368 28,274 26.4%
Net Interest Income 10,570 12,047 14.0%
NIM (%) 2.8% 2.4%  
Other Income 5,126 7,030 37.1%
Other Expense 7,694 8,978 16.7%
Provisions and contingencies 2,203 (390)  
Profit before tax 5,799 10,489 80.9%
Tax 2,090 3,635 73.9%
Profit after tax / (loss) 3,709 6,854 84.8%
Net profit margin (%) 11.3% 17.0%  
No. of shares (m)   364.3  
Book value per share (Rs)*   331.3  
P/BV (x)   1.3  
* (Book value as on 30th June 2009)

What has driven performance in 1QFY10?
  • Unable to leverage its global presence thanks to the poor demand for credit in domestic as well as overseas markets as well as correction in interest rates, Bank of Baroda (BOB) grew its advances by 28% YoY this quarter by compromising on NIMs. The fillip to domestic advance growth was provided by the SME and agriculture segments. The proportion of low cost deposits in the domestic portfolio, however, shrunk from 40% in 1QFY09 to 35% of total deposits in 1QFY10. The yields on both domestic and overseas advances dropped by 0.2% in the past 12 months. At the same time, the cost of domestic deposits dropped by 0.1% while that of overseas deposits dropped by 0.7% in the past 12 months. Nevertheless, due to poor pricing power, the bank failed to sustain its global NIMs that dropped from 2.8% in 1QFY09 to 2.4% in 1QFY10.

    Overseas business sustains momentum
    1QFY09 % of total 1QFY10 % of total Change
    Advances 1,112,135   1,426,722 28.3%
    Domestic 853,190   1,065,628   24.9%
    % of total 77%   75%    
    Agriculture 137,260 16.1% 180,100 16.9% 31.2%
    Retail 168,930 19.8% 202,210 19.0% 19.7%
    SME 120,870 14.2% 151,360 14.2% 25.2%
    Overseas 258,945   361,094   39.4%
               
    Deposits 1,549,082   1,986,095   28.2%
    Domestic 1,238,157   1,544,345   24.7%
    % of total 80%   78%    
    CASA 492,893 39.8% 584,834 34.9% 18.7%
    Term deposits 745,264 60.2% 959,511 62.1% 28.7%
    Overseas 310,925   441,750   42.1%

  • Despite BOB having drawn focus on higher fee income growth, the same grew by barely 11% YoY in 1QFY10 to form 16% of total income at the end of 1QFY10. It was, however, the 180% YoY growth in trading income that catapulted BOB’s other income this quarter. The bank currently has 78% of investments in the HTM (held to maturity) basket.

  • The bank’s cost to income ratio dropped from 49% in 1QFY09 to 47% in 1QFY10 due to the implementation of core banking solution at 100% of branches and natural attrition.

  • The net NPAs declined from 0.5% of total advances in 1QFY09 to 0.3% in 1QFY10. More importantly, the growth in cash recoveries has substantially reduced the provisioning requirement for the bank. The NPA coverage ratio stood at a comfortable 82% at the end of 1QFY10. Gross NPAs declined from 1.9% to 1.4% in the last 12 months. NPAs in the retail and housing segments were lower at 2.7% and 3.0% respectively at the end of 1QFY10 (3.5% and 4.6% respectively at the end of 1QFY09).

  • BOB is targeting an overall business growth of 23% to 25% in FY10, while growing its fee based income by at least 25% YoY.

What to expect?
At the current price of Rs 420, the stock is valued at 1 time our estimated FY11 adjusted book value. While we draw comfort from the bank’s adequate capital and high provisioning cover, low fee income proportion and exposure to overseas markets continue to remain our concerns with regard to the bank. We maintain our positive view on the stock.

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