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Bank of Baroda: Higher taxes depress profits - Views on News from Equitymaster
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Bank of Baroda: Higher taxes depress profits
Dec 3, 2014

Bank of Baroda (BOB) declared its results for the second quarter of financial year 2014-2015 (2QFY15). The bank has reported 17.5% YoY growth in net interest income and 5.5% fall in net profits for the quarter. Here is our analysis of the results.

Performance summary
  • Net interest income grew by 17.5% YoY in 2QFY15 on the back of controlled interest expenses. For 1HFY15, the net interest income (NIM) grew by 16.3% YoY
  • Other income increased by 1.8% YoY in 2QFY15 but for 1HFY15, the other income was down by 8.5% YoY.
  • Global NIMs expanded by 0.9% YoY in 2QFY15 and by 0.8% YoY during 1HFY15.
  • Operating costs increased by 14% YoY in 2QFY15 and by 13% YoY in 1HFY15.
  • While the gross NPAs have gone up from 3.15% (2QFY14) to 3.32% (2QFY15), the Net NPAs were down from 1.86% in 2QFY14 to 1.74% in 2QFY15.
  • Due to a steep jump in tax outgo, net profit fell by 5.5% YoY in 2QFY15 and grew by a subdued 5.6% YoY for 1HFY15.
  • Capital adequacy ratio (Basel III norms) stands at 12.2% at the end of 2QFY15.

Financial performance snapshot
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Interest Income 94,735 108,257 14.3% 189,604 214,836 13.3%
Interest expense 65,787 74,246 12.9% 131,765 147,542 12.0%
Net interest income 28,948 34,011 17.5% 57,839 67,294 16.3%
Net interest margin (%)       2.4% 2.4% 0.0%
Other income 9,739 9,917 1.8% 22,044 20,162 -8.5%
Other Expense 17,441 19,898 14.1% 34,121 38,631 13.2%
Provisions & Contigencies 8,608 8,880 3.2% 18,787 14,148 -24.7%
Extraordinary item (156) -   (311) -  
Profit before tax 12,482 15,149 21.4% 26,664 34,678 30.1%
Tax 801 4,107 412.7% 3,304 10,017 203.1%
Profit after tax/(loss) 11,681 11,042 -5.5% 23,360 24,661 5.6%
Net profit margin (%) 12.3% 10.2% -2.1% 12.3% 11.5% -0.8%
No. of shares (m)         431  
Book value per share (Rs)*         897.1  
P/BV (x)         1.2  
* Book Value as on 30th September 2014

What has driven performance in 2QFY15?
  • Credit offtake at 13.5% YoY remained relatively subdued as compared to deposits that have grown at 17% YoY for the quarter. As a result the credit deposit ratio fell to 68% in 2QFY15 from 70.1% in 2QFY14.

    Growth in advances remain slow
    Rs (m) 2QFY14 2QFY15 Change (%)
    Advances 3,398,553 3,857,663 13.5%
           
    Deposits 4,849,310 5,669,259 16.9%
           
    Credit Deposit Ratio 70.1% 68.0%  

  • However growth in interest income at 14.3% YoY outpaced the 12.9% increase in interest expense for the quarter. The brisk growth in the interest income was aided by 17.8% and 11% rise in revenues from wholesale banking and retail banking operations respectively on a YoY basis. Resultantly, the net interest margins expanded by 0.9% YoY during the quarter.

  • But healthy growth in net interest income failed to percolate to net profits due to a 413% jump in tax outgo for the quarter. The tax incidence shot up to 27% in 2QFY15 from 6% in 2QFY14. The provisions and contingencies increased by 3.2% YoY with the provision coverage ratio at 65.39% for the quarter.
What to expect?
At the current price of Rs 892, the stock is valued at 0.95 times our estimated FY17 adjusted book value.

Bank of Baroda has reported healthy growth in NIM in 1HFY15 on the back of robust growth in its wholesale and retail banking operations. Even the asset quality has improved, even though NPAs remain on the higher side. However net profit margins remained depressed due to steep rise in tax charges.

Given the asset quality concerns, we reiterate the view that investors should not buy the stock at current levels.

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