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Bank of Baroda: Loan recoveries offer some relief - Views on News from Equitymaster
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Bank of Baroda: Loan recoveries offer some relief
Nov 1, 2013

Bank of Baroda (BOB) declared its results for the second quarter (2QFY14) and first half of financial year 2013-2014. The bank has reported 1.1% YoY growth in net interest income and a 10.2% decline in net profits for the quarter. For 1HFY14, the profits have declined by 4.3% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 1.1% YoY in 2QFY14, on the back of 16% YoY growth in advances.
  • Other income grows by 17.6% YoY in 2QFY14 owing to robust trading gains.
  • Net interest margins for the quarter dipped to 2.3% levels.
  • Operating costs spike up by 33.3% YoY on account of wage-related provisions.
  • Net NPAs move up sharply from 0.82% in 2QFY13 to 1.86% in 2QFY14.
  • Net profit declines by 10.2% YoY in 2QFY14 on the back of poor interest income performance, and increased operating and provision expenses for the quarter.
  • Capital adequacy ratio stands at 12.07% at the end of 2QFY14.

Rs (m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Interest income 87,226 94,735 8.6% 172,802 189,604 9.7%
Interest expense 58,603 65,787 12.3% 116,198 131,765 13.4%
Net Interest Income 28,623 28,948 1.1% 56,604 57,839 2.2%
Net interest margin (%) 2.7% 2.3%        
Other Income 8,283 9,739 17.6% 15,991 22,044 37.9%
Other Expense 13,080 17,441 33.3% 26,237 34,121 30.0%
Provisions and contingencies 6,464 8,608 33.2% 15,402 18,787 22.0%
Exceptional item* 124 156 25.0% 249 311 25.0%
Profit before tax 17,237 12,482 -27.6% 30,707 26,664 -13.2%
Tax 4,223 801 -81.0% 6,304 3,304 -47.6%
Effective tax rate 24.5% 6.4%   20.5% 12.4%  
Profit after tax/ (loss) 13,014 11,681 -10.2% 24,403 23,360 -4.3%
Net profit margin (%) 14.9% 12.3%   14.1% 12.3%  
No. of shares (m)   422.5     421.3  
Book value per share (Rs)*   841.4     729.1  
P/BV (x)   0.7     0.9  
* (Book value as on 30th September 2013)

What has driven performance in 2QFY14?
  • The September quarter (2QFY14) again proved to be a weak one for BoB marking the sluggishness in the economy. While the business grew well largely backed by overseas loan book, the earnings performance suffered on account of the existing asset quality issues. That said, while the earnings pressure remained, the asset quality is showing up signs of improvement. Moreover, given the fact that the bank continues to re-balance the credit portfolio, the earnings pressure stood imminent. But the incremental slippages have begun to observe a downtrend and as per the management the return to normalcy in terms of asset quality is forthcoming.

  • The total business (global) for the bank reported a decent 17.8% YoY growth during 2QFY14 with 16.3% YoY growth in advances and 18.8% YoY growth in deposits. The credit growth was primarily driven by retail (20.0% YoY growth) and overseas credit (16.6% YoY growth) during 2QFY14. The retail credit, in turn, was driven by whopping 40.6% YoY growth in SME credit and 18.2% YoY growth in home loan portfolio. For the domestic book, the credit growth at 16.2% YoY exceeds the deposit growth of 12.5% YoY. The bank has achieved significant success in re-alignment of its portfolio spanning across retail, MSME and others.

    Overseas book drive advance growth
    (Rs m) 2QFY13 % of total 2QFY14 % of total Change
    Advances 2,921,810   3,398,550   16.3%
    Domestic 1,959,860   2,242,940   14.4%
    % of total 67%   66%    
    Retail 342,450 11.7% 410,900 12.1% 20.0%
    Home Loans 141,330 4.8% 160,450 4.7% 13.5%
    SME 345,120 11.8% 449,740 13.2% 30.3%
    Overseas 934,960 32.0% 1,090,090 32.1% 16.6%
    Deposits 4,081,500   4,849,310   18.8%
    Domestic 2,928,770   3,295,500   12.5%
    % of total 72%   68%    
    CASA* 929,790 22.8% 1,075,990 22.2% 15.7%
    Tem deposits 1,998,980 49.0% 2,219,510 45.8% 11.0%
    Overseas 1,152,730 28.2% 1,553,810 32.0% 34.8%
    Credit deposit ratio 71.6%   70.1%    
    *Only domestic CASA has been included here

  • Notably, the overseas deposits have grown 34.8% YoY and contribute as high as 32% to the total deposits of the bank. While term deposits (45.8% of total deposits) continue to dominate BoB's liability profile, the CASA share grew (15.7% YoY growth) at a higher pace than the term deposits (11.0% YoY growth). More importantly, the domestic CASA ratio has shown consistent sequential improvement and stands at 32.7% as at the end of September 2013.

  • Going with the trend observed since last few quarters, the Bank's Overseas Business continued to remain a major support to its Overall Business. During 2QFY14, the Overseas Operations contributed 32.1% to the Bank's global business, 25.0% to its gross profit and 35.2% to its core fee income.

  • Re-alignment of credit portfolio is clearly reflected in the bank's net interest income (NII) performance during 2QFY14. Hence, the NII reported tepid growth of 1.1% YoY in 2QFY14 and 2.2% YoY growth during 1HFY14. Also, the margin compression took a toll on the bank's NII growth. The margins that dipped to 2.3% in 2QFY14 from 2.7% a year ago also felt the pressures of lower yields and higher retail term deposit rates during the quarter.

  • The other income performance stood strong with 17.6% YoY growth during 2QFY14 and 37.9% YoY growth during 1HFY14. Backed by trading gains, it helped lend support to the bank's profitability. Moreover, the core fee income grew by healthy 23.1% YoY showing improvement after several quarters.

  • The operating costs for the bank stood higher reporting 30% + YoY growth both during the second quarter and first half of FY14. Higher expenses largely led by higher wage revisions, AS-15 provisions and provisions for increased dearness allowances marred the profitability for the quarter. As a result, the cost-income ratio stood higher at 45% (2QFY14) as against 35% a year ago. .

  • The last few quarters have proven troublesome for BoB in terms of asset quality. So was 2QFY14. Having said that, BoB's asset quality is expected to improve going forward. The gross NPAs and net NPAs stood at 3.15% and 1.86% with a provision coverage ratio of 61.68% during 2QFY14. On sequential basis, the slippages have reduced, but still continue to stand on the higher side at Rs 16 bn (2QFY14). As stated, the bank has engaged itself with the restructuring of portfolio activity, the forthcoming quarters are expected to show signs of improvement though in gradual manner. The restructured advances stood at Rs 15 bn during 2QFY14 as against Rs 20 bn a year ago with loans to the tune of Rs 7 bn slipping into NPA category. The total restructured book constitutes 7.7% of the bank's total advances as at the end of September 2013. With no lumpiness in the restructured book, the largest restructured account amounted to Rs 1.5 bn as at the end of September 2013.

  • Higher NPAs demanded higher provisioning requirement. Hence, the provisions for the quarter jumped by 33.2% YoY during 2QFY14 and 22.0% YoY during 1HFY14. Heightened provision on account of RBI's revised restructured guidelines marred the bank's profits.

  • Thus, higher operating costs, higher provisions and a poor core income performance dragged the profitability of the bank for 2QFY14. The net profits for the quarter declined 10.2% YoY for 2QFY14 and 4.3% YoY for 1HFY14. Quite naturally, this proved a drag for the return ratios. Therefore, RoEs were recorded at 13.6% and RoAs at 0.84% for 2QFY14.

  • Additionally at 9.3% Tier I and 12% total capital adequacy, the bank is all set to raise capital in near future to fulfill the stringent BASEL III requirements. This implies further compression in return ratios.

What to expect?

At the current price of Rs 631, the stock is valued at 0.7 times our estimated FY16 adjusted book value.

Clearly, the bank has been engaged in clean-up activity for a year now. The asset portfolio has undergone re-alignment which has taken a toll on the earnings performance of the bank. Going forward, with the refurbished portfolio in place, the margins are also expected to stabilize. The overseas business would continue to provide impetus to the business growth and strong earnings for BoB. However, the asset quality of the overseas portfolio also needs to be under check.

While the macro headwinds have ensured higher bad assets for BoB, the signs of revival may be seen in coming quarters. The incremental slippages on sequential basis are seen down and the management is confident to improve it further backed by adequate recoveries and upgradation. The lumpiness in restructured assets is coming down and the bad asset stand amply provided.

With wage revisions and AS-15 provisions already in place, the operating efficiencies may not worsen further. BOB's business model, since historical times, stands most resilient as compared to other large PSU banks. However, until the NPA risks vividly subside, we reiterate our HOLD view on the stock.

We would recommend investors to not buy the stock at current levels despite the attractive valuations. Please ensure that no single stock forms more than 3-5% of your overall portfolio.

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