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BOB: Growth challenges remain

Aug 12, 2003

Bank of Baroda (BOB) reported a relatively better start for FY04 (compared to 4QFY03) in its June quarter results. The bank reported a 34% growth in its bottomline, on the back of a topline growth of over 5% in the June quarter on a YoY basis. A significant fall in interest expenses and a sustained growth in other income arising from sale of investments has ensured yet again that the bottomline grows at a healthy rate. The bank has also done well to control costs, thus improving upon its operating margins.

(Rs m)1QFY031QFY04Change
Income from Operations 15,058 15,869 5.4%
Other Income 1,883 2,101 11.6%
Interest Expenses 9,972 9,224 -7.5%
Net interest income 5,086 6,645 30.6%
Other Expenses 3,797 4,096 7.9%
Operating Profit 1,290 2,548 97.6%
Operating Profit Margin (%)8.6%16.1% 
Provisions and Contingencies 620 1,01463.6%
Profit before Tax 2,552 3,635 42.4%
Tax 724 1,19064.4%
Profit after Tax/(Loss) 1,828 2,445 33.7%
Net Profit Margin (%)12.1%15.4% 
No. of Shares (m) 294.3 294.3  
Diluted Earnings per share (Rs)24.833.2 
P/E Ratio (x) 3.4 

The bank has indicated that its advances have grown by a marginal 4% in the June quarter compared to the same period last year. This indicates pressure on the bank's business growth. In FY03 also the bank faced pressure on this front where the advances grew by a marginal 5%. The new generation private sector banks are slowly capturing markets historically held by public sector banks. That said, falling interest rates helped BOB to mitigate the effect of poor topline. Due to lower interest expenses, the bank has been able to post a net interest income growth of 31% in 1QFY04. Due to the growth in net interest income, net interest margins (NIM) also seem to have improved over 1QFY03 levels. NIM in FY03 stood at 2.9% compared to 2.8% in FY02. However, we must also point out that due to a soft interest rate scenario, further improvement in NIM may be an uphill task and it may stagnate at this level.

BOB has also been able to improve its operating efficiencies, thus helping it further improve its operating profits as well as margins. Due to lack of need for setting up new branches (unlike private sector banks), costs seem to have been controlled. However, going forward, due to the needs of integrating a large branch network and setting up an ATM network, the operating costs of the bank are likely to go up. But the increase in costs are not likely to significantly impact the operating margins of the bank.

Apart from improvement in operating parameters, BOB, like most other public sector banks, has been positively impacted by strong growth in other income, mainly due to profit from sale of investments. While the breakup of other income has not been specified by the company, we believe that most of the other income would have been derived from profit from sale of investments. BOB had stated that it has close to Rs 30 bn in un-booked profits on its G-Sec portfolio and with the interest rates remaining soft, we are likely to see sustenance of this level of other income going forward.

The stock at Rs 131 is trading at an adjusted price to book ratio of 1.3x. Bottomline performance of the bank has been robust in 1QFY04, however, its topline performance has been a disappointment. Both, private sector as well as public sector peers seem to be eating into the market share of the bank. What is however disturbing is the fact that despite having a huge branch network, the bank has not been able to garner a larger share of the incremental advances given out by the banking sector. BOB has however done well to bring down its NPA levels (3.8% currently compared to 5.5% in the same period last year). This is likely to find favour among investors

Going forward, the biggest challenge for the bank is to integrate its large branch operations as well as reorient its employees to the new competitive realities in the Indian banking sector. Integration will bring further efficiencies in the operations of the bank, which is likely to lead to stronger business growth going forward.


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