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Bank of Baroda: Stability in margins - Views on News from Equitymaster

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Bank of Baroda: Stability in margins
Nov 1, 2011

Bank of Baroda has announced its results for the quarter ended September 2011. The company has reported a rise of 37.8% in sales and 1.4% increase in net profits for the quarter ended September 2011. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 26% YoY in 2QFY12, on the back of 24% YoY growth in advances.
  • Other income grows by 8% YoY in 2QFY12 and grows by 6% for the half year period due to a fall in treasury income.
  • Despite domestic yields on advances rising, global NIMs were sustained at 3% in 1HFY12.
  • Net NPAs move up marginally from 0.38% in 1HFY11 to 0.47% in 1HFY12.
  • Net profit up 14% YoY in 2QFY12 and 17% YoY in 1HFY12; provisions on advances and higher interest costs eat into profits.
  • Capital adequacy ratio stands at 12.7% at the end of 1HFY12.

Rs (m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Interest income 51,587 72,514 40.6% 98,856 138,832 40.4%
Interest expense 31,205 46,845 50.1% 59,895 90,191 50.6%
Net Interest Income 20,381 25,669 25.9% 38,961 48,641 24.8%
Net interest margin (%)       3.0% 3.0%  
Other Income 6,813 7,343 7.8% 12,985 13,752 5.9%
Other Expense 10,627 11,613 9.3% 20,101 22,681 12.8%
Provisions and contingencies 1,855 4,834 160.6% 4,368 8,744 100.2%
Exceptional item* - 130   - 260  
Profit before tax 14,713 16,436 11.7% 27,478 30,708 11.8%
Tax 4,520 4,775 5.7% 8,693 8,719 0.3%
Effective tax rate 30.7% 29.1%   31.6% 28.4%  
Profit after tax/ (loss) 10,193 11,661 14.4% 18,785 21,989 17.1%
Net profit margin (%) 19.8% 16.1%   19.0% 15.8%  
No. of shares (m)         391.5  
Book value per share (Rs)*         573.1  
P/BV (x)         1.3  
* (Book value as on 30th Semptember 2011)
*Charge on taking over the Assets & Liabilities of Memon Co-operative Bank

What has driven performance in 1HFY12?

  • Bank of Baroda (BOB) was able to sustain its net interest margins (NIMs) during 1HFY12. The bank consciously decided to shed its exposure to high cost bulk deposits. With 29% of its advances in overseas markets BOB grew its advance book by 24% YoY in 1HFY12. While the overseas book grew at a faster clip due to rupee depreciation. Domestic advances growth also performed in line with the sector average. However since March 2011, domestic credit growth has been flat. This is because the bank did not want to aggressively lend in light of the tough macro-environment. Its focus remains on maintaining good asset quality.
  • Even with 13 interest rate hikes by the central bank, the bank was able to maintain its NIMs at 3%. Its global NIMs and domestic NIMs have actually seen a 0.05% increase. The proportion of low cost deposits (CASA) in the domestic portfolio came in marginally lower at 25% of total deposits in 1HFY12 (27% in 1HFY11). 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 a sharper click versus the system. The bank has still not decided its stance in response to the savings bank account deregulation. However, it will take a call on this soon, and an increase in rates may help increase its CASA base.


  • Overseas and SME drive advance growth
    (Rs m) 1HFY11 % of total 1HFY12 % of total Change
    Advances 1,929,590   2,391,200   23.9%
    Domestic 1,417,320   1,690,340   19.3%
    % of total 73%   71%    
    Retail 271,920 14.1% 298,850 12.5% 9.9%
    Home Loans 113,240 5.9% 133,040 5.6% 17.5%
    SME 235,060 12.2% 301,490 12.6% 28.3%
    Overseas 512,270 26.5% 700,870 29.3% 36.8%
               
    Deposits 2,696,600   3,291,850   22.1%
    Domestic 2,060,010   2,447,200   18.8%
    % of total 76%   74%    
    CASA 739,440 27.4% 832,500 25.3% 12.6%
    Tem deposits 1,320,570 49.0% 1,614,700 49.1% 22.3%
    Overseas 636,590 23.6% 844,660 25.7% 32.7%
    Credit deposit ratio 71.6%   72.6%    

  • BOB grew its fee income by 20% YoY in 1HFY12. However, the robust growth in fee income failed to shield the poor performance of the bank's trading portfolio in the half on account of an upward movement in interest rates. Treasury yields hardened, and even the equity markets performance was lackluster, impacting trading gains. Profit on forex transactions and recovery from written off accounts saw good growth. As a result, other income grew by around 6% YoY in 1HFY12.

  • The bank's cost to income ratio improved to around 36% for the global operations in 1HFY12. For the overseas operations it stood at 16.2% in 2QFY12, showing the operating efficiency of the bank.

  • The net NPAs went up marginally from 0.38% of total advances in 2QFY11 to 0.47% in 2QFY12. However, the bank maintained sufficient provision coverage of 81.2% in 2QFY12. Gross NPAs for domestic operations were higher at 1.7% as against 0.7% for overseas operations in 2QFY12. The company was able to maintain its asset quality even in a rising interest rate environment due to its diversified loan book. It is also focused on prudently maintaining its provision coverage ratio at high levels. It only has a 5.5% exposure to the power sector and its NPAs in the large and medium enterprises, housing segment, small scale industries have seen a fall. However, its agri gross NPAs have been a rise from 3.4% to 4.6% in 1HFY12.

  • BOB's overseas business contributed 27% of the bank's total business, 20% of the gross profits and 36% of the core fee based income in 2QFY12.

  • The bank reiterated its plan to hire another 4,000 employees in FY12. In FY12, the bank plans to open 264 branches in Tier-1 & Tier-2 cities and 305 branches in smaller Tier-3 to Tier-6 cities.

What to expect?
At the current price of Rs 771.5, the stock is valued at 0.9 times our estimated FY14 adjusted book value. The bank has shown a robust performance despite a tough macro-economic environment, especially on the NII front. 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. The robust growth from SMEs has mainly come from the services space, as the manufacturing sector has been affected by the slowdown. It has controlled its lending to certain sectors where it feels there may be stress going forward such as real estate, telecom, electricity boards etc. The bank reiterated its target of growing ahead of the industry average of around 18%. We continue to maintain our positive view on the stock on account of its reasonable valuations, and the fact that it continues to outperform the sector as well as maintain superior asset quality.

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