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| Rising above the tide |
| Sarath Chelluri / Mumbai May 18, 2009, 00:59 IST |
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Advances outpaced industry average, but the jury is out on whether the bank can maintain its asset quality.
Bank of Baroda (BoB) has posted a strong set of numbers even in these tough times. Consider this: The Rs 3.36 lakh crore bank has emerged the third largest public sector bank in India, ahead of Bank of India (BOI) and Union Bank of India (UBI) in terms of business (deposits plus advances).
Credit growth at 35 per cent in 2008-09 was more than double the overall industry growth rate of 17.3 per cent. Increased profitability also led to an improvement in return on assets and return on equity to 1.15 per cent (0.93 per cent) and 19.56 per cent (15.1 per cent), respectively.
There's more. The net interest income increased by 43 per cent and the net NPA at 0.31 per cent is among the lowest in the industry.
Advances grow above industry rate
The bank has managed to improve on its five-year average advance growth of 34 per cent. Overseas advances played a key role, growing at 55 per cent. Adjusted for the exchange-rate effect, the growth is pegged at around 28-30 per cent. With nearly a quarter of its loans through overseas operations, BoB has one of the largest overseas portfolios.
According to the management, about 70 per cent of these loans are disbursed to Indian businesses operating mainly in the US, West Asia and South-East Asia. However, analysts feel the slowdown in the global economy would put pressure on this segment.
The main driver for the growth in domestic loans has been the large and medium sized companies which account for a third of the book. This segment showed an advances growth of 36.4 per cent due to tight liquidity conditions abroad and lack of alternative sources of funding.
Retail loans, however, took a knock following concerns over asset deterioration. The loan book also contains a fair mix of sectors with infrastructure topping the chart at 9.5 per cent, followed by chemicals and fertilizers at 7.8 per cent, textiles at 5.1 per cent and gems & jewellery at 0.45 per cent.
Robust net interest income
Robust loan growth and an improving credit-deposit ratio have ensured that the net interest income (NII) grew at 31 per cent in 2008-09.
| IMPROVING METRICS |
| in % |
FY 08 |
FY 09 |
| NIM |
2.91 |
2.95 |
| CASA |
38.76 |
36.00 |
| Cost-to-income |
50.89 |
45.38 |
| Provision Coverage |
75.10 |
75.50 |
| GNPA |
1.84 |
1.27 |
| NNPA |
0.47 |
0.31 |
| Capital adequacy |
12.92 |
14.10 |
The growth has been buoyant in spite of flat net interest margins at 2.95 per cent. Of late, BoB has seen an NII growth of 43 per cent compared to its peers like UBI's 20 per cent and BOI's 18 per cent in the fourth quarter of the past financial year.
The ability of the bank to BoB to rein in costs has also helped in sustaining margins. For example, UBI and BoI have shown an increase of 70 basis points and 11 basis points respectively in their cost of funds during the January-March quarter.
| ATTRACTIVE BET |
| in Rs crore |
FY 09 |
% chg* |
FY10E |
| NII |
5,123 |
31 |
6,200 |
| Other Income |
2,758 |
35 |
2,629 |
| Operating profit |
4,305 |
42 |
4,864 |
| Net profit |
2,227 |
55 |
2,442 |
| P/E |
5.40 |
|
4.90 |
| P/ABV |
0.95 |
|
0.85 |
| E: analyst estimates, * y-o-y |
In the same period, BoB was able to reduce costs by 30 bps. A higher proportion of lower cost CASA deposits at 35 per cent (compared to BOI's 30.5 per cent and UBI's 30.1 per cent) have also helped to reduce cost of funds.
The management has indicated that it would protect the NIM at the present levels of about 2.9-3 per cent. Additional branches (around 170) to the existing network of 2,900 will also help to shore up lower-cost deposits.
Stable assets
The concerns on non-performing assets have been an all-pervasive one, but BoB seems to have done fairly well in maintaining the asset quality. While the gross NPA ratio improved from 1.84 per cent (2007-2008) to 1.27 per cent (2008-09), the net NPA ratio is at 0.31 per cent.
| TREASURY GAINS |
| in Rs crore |
FY09 |
% chg |
| Interest Earned |
15,092 |
27.80 |
| Interest Expended |
9,968 |
26.20 |
| Net Interest Income |
5,123 |
31.00 |
| Non-Interest Income |
2,758 |
34.50 |
| Total Income |
7,881 |
32.20 |
| Operating Expenses |
3,576 |
17.90 |
| Operating Profit |
4,305 |
46.10 |
| Total Provisions |
2,078 |
39.10 |
| PAT |
2,227 |
55.10 |
| Advances |
1,44,000 |
34.90 |
| Deposits |
1,92,400 |
26.50 |
BoB joined other banks in restructuring loans (increasing the duration of repayment or reducing interest rate on existing loan rates) and restructured loans account for 1.8 per cent of outstanding loans. These loans could, however, turn bad as the bank has a sizeable exposure to stress sectors such as textiles, jewellery and chemicals.
Profitable growth?
The net profit in 2008-09 grew at 55 per cent (compared to a five year average of 35 per cent), mainly due to smart treasury profits. But analysts are unsure whether this scenario will last in a toughening bond-yield scenario.
Also, the bank may find it difficult to maintain its income and profitability growth in the challenging macro-economic environment, though some say this should not be a problem with a strong CASA ratio and the share of bulk deposits at just 17 per cent.
Some analysts expect the NII, operating profit and PAT to grow at 21-23 per cent, 11-14 per cent and 10-15 per cent, respectively. BoB has given returns of 17 per cent compared to the BSE Bankex gains of 12 per cent from the start of the year. The stock is trading relatively cheaper at 0.9 times its FY10 earnings (BoI at 1 time and UBI at 1.1 times).
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