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Bank of Baroda: The worst is not behind it - Views on News from Equitymaster
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Bank of Baroda: The worst is not behind it
Aug 11, 2015

Bank of Baroda (BOB) declared its results for the first quarter of financial year 2015-2016 (1QFY16). The bank has reported 3.9% YoY growth in net interest income and 22.7% fall in net profits for the quarter. Here is our analysis of the results.

Performance summary
  • Net interest income grew by 3.9% YoY in 1QFY16, on the back of a tepid 7% YoY growth in advances.
  • Other income fell by 5.6% YoY in 1QFY16 owing to a sharp fall in trading gains.
  • Global NIMs fell slightly to 2.3% in 1QFY16 from 2.4% in 1QFY15.
  • Operating costs increased by a steep 18.8% during the quarter.
  • The gross NPAs have gone up to 4.13% (1QFY16) from 3.11% (1QFY15) and the Net NPAs have risen to 2.07% in 1QFY16 from 1.58% in 1QFY15.
  • Net profit fell by 22.7% YoY due to higher provisioning, operating expenses and tax incidence.
  • Capital adequacy ratio stood at 12.7% at the end of 1QFY16.

Financial Performance Snapshot
Rs (m) 1QFY15 1QFY16 Change
Interest income 106,580 112,765 5.8%
Interest expense 73,297 78,169 6.6%
Net Interest Income 33,283 34,596 3.9%
Net interest margin (%) 2.4% 2.3%  
Other Income 10,246 9,672 -5.6%
Other Expense 18,733 22,249 18.8%
Provisions and contingencies 5,267 5,997 13.9%
Exceptional item* 0 0  
Profit before tax 19,529 16,022 -18.0%
Tax 5,910 5,501 -6.9%
Effective tax rate 30.3% 34.3%  
Profit after tax/ (loss) 13,619 10,522 -22.7%
Net profit margin (%) 12.8% 9.3%  
No. of shares (m)   2217.8  
Book value per share (Rs)*   171.6  
P/BV (x)   1.1  
*Charge on taking over the Assets & Liabilities of Memon Co-operative Bank

What has driven performance in 1QFY16?
  • Credit offtake remained tepid recording a growth of 7% YoY during the quarter mainly due to slow growth in the SME loan segment. The growth in deposits was slightly better at 7.5% during the quarter.

    Credit growth remains sluggish
    (Rs m) 1QFY15 % of total 1QFY16 % of total Change
    Advances 3,817,720   4,083,880   7.0%
    Domestic 2,594,820   2,758,210   6.3%
    % of total 68%   68%    
    Retail 445,450 11.7% 517,350 12.7% 16.1%
    Home Loans 201,680 5.3% 228,070 5.6% 13.1%
    SME 574,330 15.0% 615,420 15.1% 7.2%
    Overseas 1,222,910 32.0% 1,325,670 32.5% 8.4%
    Deposits 5,516,490   5,930,870   7.5%
    Domestic 3,654,130   4,052,110   10.9%
    % of total 66%   68%    
    CASA* 1,144,780 20.8% 1,292,230 21.8% 12.9%
    Tem deposits 2,509,350 45.5% 4,638,640 78.2% 84.9%
    Overseas 1,862,360 33.8% 1,878,760 31.7% 0.9%
    Credit deposit ratio 69.2%   68.9%    
    *Only domestic CASA has been included here

  • The interest income grew by 5.8% YoY in 1QFY16, slower than 6.6% rise in interest expense. The yield on advances of the bank was down by 0.42% during the quarter. As a result, the bank reported a marginal decline in NIMs for the quarter.

  • Operating costs have risen by a steep 18.8% in 1QFY16. During the quarter, the bank has made a provision of Rs 2627.3 m during the quarter towards wage revision and employee benefits for wage revision that became effective in November 2012. Resultantly, the cost-to-income ratio increased to 50.3% in 1QFY16 as compared to 43% recorded in 1QFY15.

  • Asset quality issues deteriorated further mainly due to higher loan slippages from the Large & Medium Industries and Medium & Small Enterprise sectors. The gross NPAs as a share of total advances rose to 4% in 1QFY16 as compared to 3% in 1QFY15. The bank has also made provision at the rate of 20% on secured sub-standard advances as against the regulatory requirement of 15%. The provision coverage ratio stood at 64.9% for the quarter.

  • Weighed down by higher provisions and operating costs coupled with higher tax incidence, the bank's net profit fell by 22.7% during the quarter.
What to expect?
At the current price of Rs 185, the stock is valued at 0.8 times our estimated FY17 adjusted book value.

Apart from the fact that the bank is witnessing very slow growth in credit, the low capital adequacy ratio is also a concern. Despite the governments recapitalization plans we do not think the bank will have enough capital to meet Basel III norms as well as fund growth. With no improvement in asset quality, we reiterate that investors should not buy the stock at current levels.

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