Bank of Baroda: Slippages continue to hurt - Views on News from Equitymaster

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Bank of Baroda: Slippages continue to hurt

Oct 25, 2012

Bank of Baroda (BOB) declared its results for the second quarter of financial year 2012-2013 (2QFY13). The bank has reported 20% YoY and a 12% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 11.5% YoY in 2QFY12, on the back of 22% YoY growth in advances.
  • Other income grows by 13% YoY in 2QFY12 and grows by 16% for the half year period due to an increase in trading gains.
  • On account of lower domestic yields on advances and higher deposit costs, global NIMs contracted to 2.7% in 1HFY13 compared to 3% earlier.
  • Net NPAs moved up from 0.47% in 1HFY12 to 0.82% in 1HFY13.
  • Net profit was up 12% YoY in 2QFY13 and 11% YoY in 1HFY13; provisions on advances and higher interest costs ate into profits.
  • Capital adequacy ratio stands at 12.9% at the end of 1HFY13.

Rs (m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Interest income 72,514 87,226 20.3% 138,832 172,802 24.5%
Interest expense 46,845 58,603 25.1% 90,191 116,198 28.8%
Net Interest Income 25,669 28,623 11.5% 48,641 56,604 16.4%
Net interest margin (%)       3.0% 2.7%  
Other Income 7,343 8,283 12.8% 13,752 15,991 16.3%
Other Expense 11,613 13,080 12.6% 22,681 26,237 15.7%
Provisions and contingencies 4,834 6,464 33.7% 8,744 15,402 76.1%
Exceptional item* 130 124 -4.4% 260 249 -4.3%
Profit before tax 16,436 17,237 4.9% 30,708 30,707 0.0%
Tax 4,775 4,223 -11.6% 8,719 6,304 -27.7%
Effective tax rate 29.1% 24.5%   28.4% 20.5%  
Profit after tax/ (loss) 11,661 13,014 11.6% 21,989 24,403 11.0%
Net profit margin (%) 16.1% 14.9%   15.8% 14.1%  
No. of shares (m)         411.1  
Book value per share (Rs)*         702.5  
P/BV (x)         1.1  
* (Book value as on 30th Semptember 2012)
*Charge on taking over the Assets & Liabilities of Memon Co-operative Bank

What has driven performance in 1HFY13?
  • Bank of Baroda (BOB) was not able to sustain its net interest margins (NIMs) during 1HFY13 on higher costs of funds and lower advance yields. With 32% of its advances in overseas markets BOB grew its advance book by 22% YoY in 1HFY13, which came in higher than the sector average. The overseas book grew at a faster clip due to rupee depreciation. Domestic advances growth performed slightly above the sector average.

  • The proportion of low cost deposits (CASA) in the domestic portfolio came lower at 23% of total deposits in 1HFY13 (25% in 1HFY12). CASA growth however slowed down to some extent, as customers preferred to opt for term deposits, on account of the higher prevailing interest rates in India. Irrespective, the bank has been able to grow CASA at 12% YoY.

    Overseas and SME drive advance growth
    (Rs m) 1HFY12 % of total 1HFY13 % of total Change
    Advances 2,391,200   2,921,810   22.2%
    Domestic 1,690,340   1,986,850   17.5%
    % of total 71%   68%    
    Retail 298,850 12.5% 342,450 11.7% 14.6%
    Home Loans 133,040 5.6% 147,890 5.1% 11.2%
    SME 301,490 12.6% 369,150 12.6% 22.4%
    Overseas 700,870 29.3% 934,960 32.0% 33.4%
    Deposits 3,291,850   4,081,500   24.0%
    Domestic 2,447,200   2,928,770   19.7%
    % of total 74%   72%    
    CASA 832,500 25.3% 929,790 22.8% 11.7%
    Tem deposits 1,614,700 49.1% 1,998,980 49.0% 23.8%
    Overseas 844,660 25.7% 1,152,730 28.2% 36.5%
    Credit deposit ratio 72.6%   71.6%    

  • BOB grew its fee income by 2.8% YoY in 2QFY13. However, other income was up 13% YoY in 2QFY13. Profit on forex transactions and trading gains saw good growth. Other income was also up 16% YoY in 1HFY13.

  • The bank's cost to income ratio improved to around 36.5% for the global operations in 1HFY13. In FY08 this ratio was as high as 51%. For the overseas operations it stood at 16.4% in 1HFY13, showing the operating efficiency of the bank.

  • The net NPAs went up from 0.47% of total advances in 2QFY12 to 0.82% in 2QFY13. However, the bank maintained sufficient provision coverage of 75.7% in 2QFY13. Gross NPAs for the overall book came in higher at 2% as against 0.6% for overseas operations in 2QFY13. NPAs in the large and medium enterprises, housing segment, retail, small scale industries have seen a spike.

  • The bank restructured Rs 9.3 bn worth of loans in 2QFY13 which was higher than the Rs 7.7 bn worth of restructuring seen in the first quarter. The overseas book also saw some restructuring pains with 12 accounts worth Rs 4.5 bn being restructured so far this year.

  • BOB's overseas business contributed 29% of the bank's total business, 25% of the gross profits and 39% of the core fee based income in 2QFY13.

What to expect?
At the current price of Rs 781, the stock is valued at 0.9 times our estimated FY15 adjusted book value. The bank has shown a robust performance on the operating front despite a tough macro-economic environment, especially on the NII front and even growth in other income was steady. On account of its extensive presence overseas, BOB has greater headroom to absorb higher cost of funds.

The bank has seen a strong growth in its overseas loan book as well as from the small and medium enterprises (SME) space. It has seen a broad based expansion in the loan book and has strategically gone slow on certain accounts like retail etc. The bank expects to grow ahead of the sector in FY13 as well, and has seen strong advance growth of 22% so far this year. The increase in restructured assets is a worry, however most of the large chunky accounts have been taken care of now, and the future restructuring pipeline is small. However, greater provisioning on these bad accounts dampened profit growth for the 6 months period. The bank reiterated its target of growing ahead of the industry average, despite the challenging environment. Having been reasonably conservative in our forward estimates, we reiterate our BUY view on the stock on account of its reasonable valuations.

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