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BoB: Business under stress

Nov 8, 2001

Declining credit offtake and a pressure on interest margins impacted Bank of Baroda's (BoB) second quarter performance. The bank's profits dropped by 22% and interest income remained flat in 2QFY02. Excluding VRS charge, earnings of the bank were actually higher by 12%.

(Rs m)2QFY012QFY02Change1HFY011HFY02Change
Interest Income 14,679 14,730 0.3% 28,787 29,734 3.3%
Other Income 1,241 2,541 104.7% 2,673 4,311 61.3%
Interest Expenditure 9,985 10,571 5.9% 19,342 20,018 3.5%
Operating Profit (EBDIT) 4,695 4,159 -11.4% 9,446 9,716 2.9%
Operating Profit Margin (%)32.0%28.2% 32.8%32.7% 
Other Expenditure 3,249 3,782 16.4% 6,614 7,045 6.5%
VRS expenses - 438  - 875 
Profit before Tax2,6872,480-7.7%5,5056,10710.9%
Provisions & Contingencies 870 1,236 42.1% 1,700 2,386 40.4%
Tax 550 260 -52.8% 1,020 910 -10.8%
Profit after Tax/(Loss) 1,266 984 -22.3% 2,784 2,811 1.0%
Net profit margin (%)8.6%6.7% 9.7%9.5% 
No. of Shares (eoy) 294 294   294 294  
Diluted Earnings per share*17.213.4 18.919.1 
P/E (at current price) 2.9  2.0 
*(annualised)      

The bank's operating margins are one of the highest in the industry. However, the bank failed to maintain the higher margins in the falling interest rate scenario. Its OPM plunged by over 370 basis points to 28%. In the first half, the margins remained at the same level compared to first half of the previous year due to a substantial rise in OPM in 1QFY02. BoB's interest margins are expected to come down to the level of about 28% for the full year ended March 2002 considering the softening interest rates, increasing competition and more liquidity in the system.

During the quarter, the bank's other income doubled and accounted for 38% of total income compared to 21% in 2QFY01. The ratio is one of the highest in the banking sector. Over dependence on this volatile revenue stream could affect the bank's quality of earnings in the coming quarters.

Break up of interest income
(Rs m)2QFY012QFY02Change1HFY011HFY02Change
Interest on advances 7,468 7,408 -0.8% 7,468 7,408 -0.8%
Income from investments 5,506 6,091 10.6% 5,506 6,091 10.6%
Interest on balance with RBI 1,433 1,073 -25.1% 1,433 1,073 -25.1%
Others 272 157 -42.3% 272 157 -42.3%
Total 14,679 14,730 0.3% 14,679 14,730 0.3%

While other banks have successfully controlled the cost, BoB's cost to income ratio jumped to 63% from 55% in 2QFY01. The bank plans to spend Rs 1 bn in FY02 for technology upgradation, which includes computerization and networking of branches. Higher IT spend could have resulted in cost to income ratio moving in upward direction. Provision for VRS expenses also lowered the earnings growth. The total cost of VRS was Rs 8.5 bn out of which BOB has already written off Rs 1.7 bn in FY01. The bank will write off the balance amount equally in the next 4 years. Consequently, in the first half it has provided for Rs 875 m on a pro-rata basis. Apart from this, a 42% rise in provisions for NPAs contributed to a fall in profits.

At the current market price of Rs 39, BoB is trading at a P/E of 2x and Price/Book value ratio of 0.4x 1HFY02 annualised earnings. The bank's lower valuations are resulting from pressure on its core business, public sector status and slow adaptation to technology.

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