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Bank of Baroda: Pressure on overseas business - Views on News from Equitymaster

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Bank of Baroda: Pressure on overseas business

Oct 30, 2009

Performance summary
  • Interest income grows by 19% YoY in 1HFY10, on the back of 25% YoY growth in advances.
  • Other income grows by 31% YoY backed by growth in treasury income.
  • While domestic NIMs remain stable at 2.9%, fall in overseas NIMs to the extent of 0.5% (to 1.6% in 1HFY10) takes a toll on profitability.
  • Net NPAs decline from 0.4% in 2QFY09 to 0.3% in 2QFY10.
  • Capital adequacy ratio comfortable at 14.7% (as per Basel II) at the end of 1HFY10

Rs (m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Interest income 35,510 41,354 16.5% 68,448 81,675 19.3%
Interest Expense 24,172 27,468 13.6% 46,540 55,742 19.8%
Net Interest Income 11,338 13,886 22.5% 21,908 25,933 18.4%
NIM (%)       2.8% 2.5%  
Other Income 4,759 5,953 25.1% 9,885 12,984 31.4%
Other Expense 8,241 9,523 15.6% 15,934 18,501 16.1%
Provisions and contingencies 1,819 1,163 -36.1% 4,022 774 -80.8%
Profit before tax 6,037 9,153 51.6% 11,837 19,642 65.9%
Tax 2,084 2,811 34.9% 4,175 6,446 54.4%
Profit after tax / (loss) 3,953 6,342 60.4% 7,662 13,196 72.2%
Net profit margin (%) 11.1% 15.3%   11.2% 16.2%  
No. of shares (m)       364.3 364.3  
Book value per share (Rs)*         348.7  
P/BV (x)         1.5  
* (Book value as on 31st September 2009)

What has driven performance in 2QFY10?
  • Taking the advantage of low interest rates, Bank of Baroda (BoB) grew its global advances and global deposits by 25% and 29% respectively in 1HFY10. 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 was 36% of total deposits in 1HFY10. BOB increased its exposure to SME and agricultural assets while cutting down its retail loan book in the last quarter. While the bank hopes to sustain the level of NIM in the range of 25% to 3% in FY10, we have conservatively estimated at 2.2% for the full year.

    Taking advantage of cost arbitrage
      1HFY09 % of total 1HFY10 % of total Change
    Advances 1,187,500   1,489,190   25.4%
    Domestic 905,930   1,096,410   21.0%
    % of total 76%   74%    
    Agriculture 146,250 12.3% 185,750 16.9% 27.0%
    Retail 177,450 14.9% 214,030 14.4% 20.6%
    SME 126,840 10.7% 166,660 11.2% 31.4%
    Overseas 281,570   392,780   39.5%
    Deposits 1,610,690   2,073,540   28.7%
    Domestic 1,310,190   1,606,080   22.6%
    % of total 81%   77%    
    CASA 505,733 38.6% 580,919 36.2% 14.9%
    Term deposits 804,457 61.4% 1,025,161 63.8% 27.4%
    Overseas 300,500   467,460   55.6%

  • Although, BOB seems to have drawn focus on this counter to shield its profits from getting eroded by the lower NIMs and treasury losses a large part of the other income in 1HFY10 were primarily from trading gains. Fee income backed by growth in commissions and forex income grew by 13% to form 11% of total income at the end of 1HFY10. The bank currently has 78% of investments in the HTM basket.

  • The bank’s cost to income ratio was 53% for the domestic operations and 22% for the overseas operations in 1HFY10. Overall cost to income ratio was 47% in 1HFY10.

  • The net NPAs declined from 0.4% of total advances in 1HFY09 to 0.3% in 1HFY10. More importantly, the growth in cash recoveries substantially reduced the provisioning requirement for the bank in 1HFY10. The NPA coverage ratio stood at a comfortable 79% at the end of 1HFY10.

  • BOB’s overseas business contributed 24% of the bank’s total business, 23% of profits and 37% of the fee based income in 1HFY10.

  • BoB is targeting an overall business growth of 25% in FY10, while growing its fee based income by atleast 20% YoY.

What to expect?
At the current price of Rs 528, the stock is valued at 1.0 time our estimated FY12 adjusted book value. The bank has marginally outperformed our broad asset growth and margin estimations so far in FY09. While we draw comfort from the bank’s adequate capital and high provisioning cover, the low fee income proportion is our concerns with regard to the bank. We maintain our positive view on the stock.

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