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Bank of Baroda: Provisions dampen profits - Views on News from Equitymaster
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Bank of Baroda: Provisions dampen profits
Nov 8, 2010

Bank of Baroda declared its 2QFY11 results. The bank has reported 47% YoY growth in net interest income while net profits have grown by 61% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 50% YoY in 1HFY11, on the back of 30% YoY growth in advances.
  • Other income grows by 14% YoY in 2QFY11 but remains flat for the half year period due to fall in treasury income.
  • Despite yields on overseas assets remaining substantially low, global NIMs move up from 2.6% in 1HFY10 to 3.0% in 1HFY11.
  • Net NPAs move up from 0.3% in 1HFY10 to 0.4% in 1HFY11.
  • Net profit up 42% YoY in 1HFY11; provisions for restructured loans eat into the profits.
  • Capital adequacy ratio comfortable at 13.2% at the end of 1HFY11.

Rs (m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Interest income    41,354      51,587 24.7%       81,675       98,856 21.0%
Interest Expense    27,468      31,205 13.6%       55,742       59,895 7.5%
Net Interest Income    13,886      20,382 46.8%       25,933       38,961 50.2%
NIM (%)       2.6% 3.0%  
Other Income      5,953         6,813 14.4%       12,984       12,985 0.0%
Other Expense      9,523      10,627 11.6%       18,501       20,100 8.6%
Provisions and contingencies      1,163         1,855 59.5%            774         4,368 464.3%
Profit before tax      9,153      14,713 60.7%       19,642       27,478 39.9%
Tax      2,811         4,520 60.8%         6,446         8,694 34.9%
Profit after tax / (loss)      6,342      10,193 60.7%       13,196       18,784 42.3%
Net profit margin (%) 15.3% 19.8%   16.2% 19.0%  
No. of shares (m)                 364.2  
Book value per share (Rs)*                 430.0  
P/BV (x)                      2.4  
* (Book value as on 30th September 2010)

What has driven performance in 2QFY11?
  • Re-pricing loans at a faster clip helped BOB sustain margins during the quarter and half year ended September 2011. With 27% of its advances in overseas markets Bank of Baroda grew its advance book by 30% in 1HFY11. While the overseas book grew at a marginally faster clip, the domestic advances growth also outperformed the sector average. Despite the pressure on overseas interest rates, the bank's margins (NIMs) improved from 2.6% in 1HFY10 to 3.0% in 1HFY11 due to re-pricing of domestic assets. 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 remained stable at 36% of total deposits in 1HFY11.

    Going slower on overseas book
      1HFY10 % of total 1HFY11 % of total Change
    Advances    1,489,190       1,929,590   29.6%
    Domestic    1,096,410       1,417,320   29.3%
    % of total 74%   73%    
    Agriculture       177,440 11.9%        215,550 15.2% 21.5%
    Retail       214,030 14.4%        271,920 14.1% 27.0%
    SME       166,660 11.2%        235,060 12.2% 41.0%
    Overseas       392,780          512,270   30.4%
    Deposits    2,073,550       2,696,600   30.0%
    Domestic    1,606,090       2,060,010   28.3%
    % of total 77%   76%    
    CASA 580,910 36.2% 739,440 35.9% 27.3%
    Term deposits 1,025,180 63.8% 1,320,570 64.1% 28.8%
    Overseas 467,460   636,590   36.2%

  • BOB grew its fee income by nearly 29% YoY in 2QFY11. However, the fees failed to shield the poor performance of the bank's trading portfolio in 1QFY11 due to upward movement of interest rates. As a result for the half year period the other income remained flat.

  • The bank's cost to income ratio declined from 48% to 39% for the global operations in 1HFY11. For the overseas operations it stood at 20% in 1HFY11.

  • The net NPAs went up marginally from 0.3% of total advances in 1HFY10 to 0.4% in 1HFY11. However, sufficient provision coverage of 73% substantially reduced the provisioning requirement for the bank in 1QFY11. Gross NPAs for domestic operations were higher at 1.7% as against 0.6% for overseas operations in 1HFY11.

  • BOB's overseas business contributed 25% of the bank's total business, 16% of profits and 27% of the fee based income in 1HFY11.

  • The bank plans to hire another 4,200 employees in FY12 having already recruited 4,161 employees in FY11.

What to expect?
At the current price of Rs 1,039, the stock is valued at 1.5 times our estimated FY13 adjusted book value ( ResearchPro subscribers can view latest updates here). The bank has marginally outperformed our broad asset growth estimations. While we draw comfort from the bank's adequate capital and provisioning cover, the vulnerable other income and incremental slippages are our concerns with regard to the bank. We maintain our positive view on the stock.

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