Bank of Baroda Ltd. (BoB) is the fourth largest state owned bank in India in terms of its balance sheet size. The bank offers a wide range of banking services to its corporate and retail clients.
As of September 2006, BoB has a network of 2,703 branches and 700 ATMs spread across India. Apart from this strong domestic presence, BoB has 60 branches and offices across 21 countries in four continents.
Government of India owned 53.8% of the bank as of September 06 followed by Foreign Institutional Investors (FIIs) with 20.1% stake. Indian public held 9.5% of the bank.
The bank is listed on the Bombay Stock Exchange, National Stock Exchange.
Financial Performance Review - 2006
BoB is clearly posing competition to all the major players in the banking industry. BoB is showing strong growth in its NII since the last few years. Interest income of the bank grew at a CAGR of 4.5% for the period 2002-2006 and stood at Rs71.0bn at the end of Mar 31, 2006. During the same period, interest expense decline by a modest CAGR of 1.3% due to restructuring of its liabilities. This resulted in a CAGR of 14.5% in its net interest income. For the financial year ended Mar 31, 2006 interest income of the bank grew by 10.4% over the previous year to Rs71.0bn while interest expense rose by 12.3% to Rs.38.8bn. The overall result was that the net interest income of the bank jumped by 8.2% to Rs.32.25bn.
In case of total non interest income, BoB has not made any significant impact as it grew by a CAGR of modest 4.7% during the period FY02 to FY06. This is mainly because of the lower profit on sale of investments in FY06 while income from forex transactions grew at a CAGR of 11% during the same period.
Operating expenses of the bank grew in line with the growth in business. The total operating expenses grew at a CAGR of 11.1% during the last four years. For the year ended Mar-06, operating expenses rose by 20.3% over the previous year and stood at Rs23.8bn. Employee expenses, which always contributed substantial chunk of the total operating expenses, grew by 10.3% in FY2006 to Rs15.24bn. During the year 2006 there was a decline in the operational efficiency of the bank as the cost to total operating income after provision increased from 69.7% in FY05 to 72.8% in FY06.
Overall, the bank reported a satisfactory performance during the past four years with net profitability of the bank recording a CAGR of 11.4%. The profit before tax as of March 2006 was at Rs.8.92bn as against Rs.8.6bn in March 2005. However, profit after tax increased significantly to Rs.8.27bn as against Rs.6.77bn in 2004-05. Manpower productivity has also risen over the years as profit per employee increased steadily from Rs.0.14mn in FY02 to Rs.0.21mn in FY06. During the same period, the business per employee has increased from Rs24.5mn to Rs39.6mn.
The return on average assets declined from 1.2% in FY04 to 0.79% in FY06, while the return on average equity down from 20.3% in FY04 to 12.3% in FY06.
The total credit book of the bank grew at a CAGR of 15.5% during the last 4 years. Credit portfolio of the bank stood at Rs599.2bn as on 31st Mar’06, outshined the previous year’s performance with an incremental growth of 38.04%. The domestic advances grew significantly by 41.2% in FY06 against overseas advances which showed a growth of 23.2%.
The ratio of gross NPL to gross loans stood at 3.96% in 2006 down sharply from 13.3% in 2002 while the net NPLs to net loans stood at 0.86%. The bank has provided for about 77.3% of its non-performing loans in 2006. The bank continued to improve its asset quality, as a result of which net NPLs, declined substantially from 1.43% as on 31st March 2005 to 0.86% as on 31st March 2006.
The deposit growth has been satisfactory, especially the term deposit category. Total deposits grew at a CAGR of 11% over the period 2002-06 to reach Rs936.6bn, with low cost deposits registering a CAGR of over 14.9% during the same period. Contribution of low cost deposit to total deposit during the period too has moved up from just 32.97% in FY’02 to over 37.94% in FY’06.
Borrowing from RBI and other banks and financial institutions constituted around 4.24% of the total liabilities and shareholders equity of the bank while subordinated debt comprised around 2.0% of the same. In FY06, borrowings of the bank increased by 192.7% to Rs.48.02bn. Subordinated debt outstanding at the end of FY06 stood at Rs.22.7bn.
Capital Adequacy Ratio (CAR) of the bank was at a comfortable level of 13.65% as on 31st March, 2006. During FY06, the bank strengthened its capital base by raising Rs.16.33bn through a follow on public offer and Rs.7.70bn by way of subordinated bonds (tier-II capital). The bank's net worth as at 31st March, 2006 was Rs.76.2bn comprising of paid-up equity capital of Rs.3.65bn and reserves (excluding revaluation reserves) of Rs.72.54bn. An amount of Rs.6.19bn was transferred to reserves from the profits earned during FY06.
First Quarter Results – Q1FY2007
During the first half of FY07, interest income of the bank increased strongly by 23.35% to Rs41.5bn as compared to Rs33.7bn in H1FY06 while interest expense increased at a higher rate of 33.2% from Rs18.3bn in H1FY06 to Rs24.3bn in H1FY07. This has resulted in net interest income growth of 11.7% during the same period. The spreads (including International business) has declined marginally to 3.18% compared with 3.37% in H1FY06. This was underpinned by a 54bp improvement in yield on advances to 8.12% and a mere 31bp increase in cost of deposit to 4.43% while the yield on investment remained flat.
Loans grew by 45% to Rs710bn in 2QFY07, with growth arising mainly from retail, SMEs and agricultural credit. Retail advances grew by 56% YoY to Rs114bn and are 19% of the domestic loan book, which in turn is around 82% of bank's total loan book. The growth in loans has resulted in a 57% upsurge in interest earned on advances.
The bank's global deposits grew by 25% YoY to Rs107.6bn in 2QFY07. Domestic deposit growth was 19% and currently constituted around 82% of total deposits. Overseas deposits are up by 60% YoY to Rs195bn. BoB continued to maintain higher CASA at 42% of domestic deposits (34.2% of total deposits).
Asset quality continued to improve on the back of aggressive provisioning and strong recoveries. Net NPAs declined to 0.77% whereas gross NPAs dropped to 3.44% at the end of Q2FY06. During 1HFY07, total cash recovery was Rs1.7bn, recovery in written-off accounts was Rs1.1bn, while asset upgradation was to the extent of Rs501mn. Loan loss coverage was at the comfortable level of 78%.
Investment Indicators
Price ( As on Dec 14, 2006) Shares in Issue Market Cap 52 week price range
Rs.240 366mn Rs.87.84bn Rs.296/176
Year Net Interest Income Rs. mn Net profit Rs. mn EPS Rs. BVPS Rs. ROAE
(%) P/E
(x) P/BV
(x)
2008 (E) 39,316 12,221 33.4 257.8 13.6 7.8 1.01
2007 (E) 35,509 9,954 27.2 234.3 12.1 9.6 1.12
2006 (A) 32,249 8,270 22.6 214.6 12.3 9.7 1.02
2005 (A) 29,793 6,768 23.0 191.1 12.6 7.8 0.94
Historical P/E & P/BV multiples pertain to respective year-end prices, while those for future years are based on market price on the Bombay Stock Exchange as on Dec 14, 2006.
Source: Bank of Baroda and Global’s Estimate
Bank of Baroda is expected to show strong earnings visibility over the next few years. As a result, we have valued BoB’s share price at Rs.304. The stock currently trades at around Rs.240, which implies that the value arrived at using the weighted average method is around 26.5% higher than the current market price. The bank currently trades at 8.8x and 7.2x of its earnings for FY07E and FY08E respectively and 1.02x and 0.93x of its book value. BoB has been improving on all key parameters for the last few quarters. We believe that going forward BoB is likely to be a beneficiary of low operating expenses, steady NII growth and stable margin outlook. At the current market price the stock seems to be undervalued valued with a good upside, hence, we recommend a BUY on the stock with a medium term perspective.
