The Hindu Business Line : Bank of Baroda: Hold

Diversified loan book
Global presence
Focus on CASA
What makes the bank attractive is its diversified quality loan book, high proportion of investments in the HTM category and healthy low-cost deposits.

Mr M. D. Mallya, Chairman and Managing Director.

M. V. S. Santosh Kumar

Bank of Baroda (BoB) shareholders can consider staying invested in the stock at the current price of Rs 294.65. The stock trades at 1.13 times the company’s 2007-08 book value and 7.5 times the earnings, translating into 0.93 times the estimated book value for 2008-09.

As one of the larger public sector banks, BoB’s stock has performed better than most of its peers in 2008. What makes the bank attractive from an investment perspective is its diversified high quality loan book, high proportion of investments in the held-to-maturity (HTM) category, healthy proportion of low-cost deposits, specialised centres for retail and SME credit and extensive branch network which still remains under-leveraged.

The loan book comprises of 20 per cent loans to retail, 16 per cent to agriculture, 23 per cent to the corporate segment and 14 per cent to SMEs. International presence is important to BoB, as it contributes to 20 per cent of the total business.

Though the margins are lower in international branches, the diversified presence reduces risks related to a domestic credit slowdown. The bank intends opening 100 domestic and 10 overseas branches this fiscal, which may bolster low-cost deposits, advances and fee income.

Financials

The bank’s advances have increased at a 31 per cent compounded annual growth rate (CAGR) from FY04-FY08 and the credit-deposit ratio has improved from 51.2 to 77.3, indicating robust credit growth, with excess cash being deployed for lending instead of ending up as low-yield investments.

In the June 2008 quarter, the bank clocked a loan growth of 42 per cent year-on-year but could not translate this into equivalent growth in earnings. The cost-income reduced to 45 per cent from 51.5 per cent, indicating that the bank has efficiently managed costs in a challenging climate. Net interest income grew by 10 per cent and profit after tax by 12 per cent.

The low growth in profits can be attributed mainly to provisioning — mark-to-market loss on the bond portfolio, employee retirement benefits (AS-15), provision for credit-linked notes and arrears on employees salary towards impending pay revisions. In its investment portfolio, the bank has transferred a portion of its available-for-sale securities to the HTM category last quarter, which led to a relatively lower mark-to-market loss of Rs 180 crore.

The bank holds 68 per cent of its SLR investments in HTM portfolio. The bank’s net interest margin has come down to 2.76 per cent from 3.06 per cent due to increased cost of funds, reduction of lending rates in February and also rising interest rates which led to a fall in yields.

Low-cost current account savings account deposits (CASA) account for 36.86 per cent of the total deposits, which is quite high, which will act as cushion for the bank in a high interest rate scenario.

The government’s stake in BoB is 53.81 per cent; this may limit the bank’s capital raising options should a need arise to bolster capital adequacy. However, BoB is well-placed both on capital adequacy and NPA coverage. The capital adequacy is at a comfortable 13.19 per cent, which will help the bank grow its loan book aggressively. The bank’s NPA provisioning coverage is at 72 per cent, well above the RBI stipulated norms.

Outlook and risks

The bank’s financial performance has been good in these challenging times. Yet, there are risks to earnings from macro factors such as rising interest rates and reserve requirements. A rising CRR stipulation may affect the bank’s profitability as this yields no income to the bank. Technology upgradation is a challenge as it requires higher costs to upgrade the rural branches to CBS.

Overseas branch exposure to credit-linked notes, provisioning for bad loans and mark-to-market losses on AFS portfolio may dampen the bank’s profitability.

In this context, the NPA, as a proportion of advances, has decreased year-on-year, but increased slightly on a sequential basis, on the back of an aggressively growing loan book. There is a possibility of asset quality deteriorating if the current economic and financial conditions continue.

The bank has indicated its intention of re-pricing assets in interest-sensitive sectors, which might lead to higher yield on advances.

Business apart, the other trigger to the stock valuation may arise from a possible stake sale or IPO by UTI AMC (in which BoB holds a 25 per cent stake). Any successful turnaround of subsidiaries — BoB Capital markets, BoB Asset Management Company and BoB Credit Cards — may also lead to better valuations. Pioneer AMC has bought 51 per cent stake in BoB AMC.

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