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Bank of Baroda: Still banking on overseas business - Views on News from Equitymaster
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Bank of Baroda: Still banking on overseas business
Nov 4, 2008

Performance summary
  • Interest income grows by 25% YoY in 1HFY09, on the back of 33% YoY growth in advances.

  • Fee income grows by 39% YoY.

  • Net interest margins drop to 2.8% in 1HFY09 (2.9% in 1HFY08); CASA proportion drops to 37% of total deposits.

  • Cash recoveries being commensurate with incremental slippages - saves NPA blushes.

  • Agricultural debt waiver Rs 5.1 bn; Rs 1.6 bn to be reimbursed by government in 3QFY09.



Rs (m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Interest income 28,797 35,509 23.3% 54,802 68,448 24.9%
Interest Expense 18,983 24,172 27.3% 35,943 46,540 29.5%
Net Interest Income 9,814 11,337 15.5% 18,859 21,908 16.2%
NIM (%)       2.9% 2.8%  
Other Income 4,540 4,759 4.8% 8,784 9,884 12.5%
Other Expense 7,982 7,640 -4.3% 14,825 14,734 -0.6%
Provisions and contingencies 981 2,419 146.6% 2,394 5,222 118.1%
Profit before tax 5,391 6,037 12.0% 10,424 11,836 13.5%
Tax 2,120 2,084 -1.7% 3,842 4,174 8.6%
Profit after tax / (loss) 3,271 3,953 20.8% 6,582 7,662 16.4%
Net profit margin (%) 11.4% 11.1%   12.0% 11.2%  
No. of shares (m)       365.5 365.5  
Book value per share (Rs)*         283.0  
P/BV (x)         1.0  
* (Book value as on 30th September 2008)

What has driven performance in 2QFY09?
  • Bank of Baroda (BoB) managed to grow its advances by 33% in 1HFY09, primarily led by growth in overseas assets and agricultural assets in the domestic portfolio. The growth in low cost overseas deposits was; however, lower than the domestic deposits due to the higher interest rates offered on the domestic deposits, particularly bulk deposits. While the bank does not have exposure to high risk assets abroad, its overseas investments continue to remain subject to the volatility in interest rates. Further, the bank hopes to sustain the level of NIM at 3.0% in FY09 (2.8% in 1HFY09) by passing on the rate hike on incremental advances.

    Taking advantage of cost arbitrage

    1HFY08 % of total 1HFY09 % of total Change
    Advances 901,829   1,194,750   32.5%
    Domestic 692,328   913,180   31.9%
    % of total 77%   76%    
    Agriculture 114,005 12.6% 149,460 16.4% 31.1%
    Retail 144,621 16.0% 177,450 14.9% 22.7%
    SME 102,208 11.3% 126,840 10.6% 24.1%
    Overseas 209,501   281,570   34.4%
               
    Deposits 1,313,831   1,610,693   22.6%
    Domestic 1,060,883   1,310,190   23.5%
    % of total 81%   81%    
    CASA 409,501 38.6% 483,460 36.9% 18.1%
    Term deposits 651,382 61.4% 826,730 63.1% 26.9%
    Overseas 252,949   300,503   18.8%

  • After having stagnancy in its fee revenues over several quarters, BOB seems to have finally drawn focus on this counter to shield its profits from getting eroded by the lower NIMs and treasury losses. Fee income backed by growth in commissions and forex income grew by 39% to form 10% of total income at the end of 1HFY09. The bank currently has 68.3% of investments in the HTM basket.

  • The bank’s cost to income ratio dropped from 54% in 1HFY08 to 46% in 1HFY09 due to the implementation of core banking solution at 94% of branches and natural attrition.

  • While Bank of Baroda has witnessed a 5.3% YoY reduction in the absolute value of its gross NPAs over the last 12 months; the net NPAs too have declined from 0.6% of total advances in 1HFY08 to 0.4% in 1HFY09. More importantly, the growth in cash recoveries substantially reduced the provisioning requirement for the bank in 1HFY09. The NPA coverage ratio stood at a comfortable 73.9% at the end of 1HFY09. Gross NPAs in the domestic operations were 2% while in international operations they were 0.6%.

  • The international operations contributed 21% each to the bank’s business growth and profitability, while its contribution to fee income was 32%. The cost to income ratio in the overseas business was 20%.


What to expect?
At the current price of Rs 227, the stock is valued at 0.7 times our estimated FY11 adjusted book value. The bank has marginally outperformed our broad asset growth and margin estimations and we will need to upgrade our forward estimations if the same continues in the forthcoming quarters of this fiscal. While we draw comfort from the bank’s adequate capital and high provisioning cover, low fee income proportion and exposure to overseas markets during a tight liquidity scenario are our concerns with regard to the bank. We maintain our positive view on the stock.

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