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Bank of Baroda is among the latest beneficiaries of the Government's bank recapitalisation programme. The Government of India has infused Rs 3,280 crore in the bank to improve its stake to 58 per cent from the current 53.6 per cent.
capital adequacy ratio
The current infusion would help Bank of Baroda fund the long-term credit demands of the corporate sector, maintain capital adequacy ratio above 12 per cent, and also be margin accretive in the near-term. The bank's advances grew at higher than annual industry average (27.5 per cent) during the period between 2006 and 2010. As of December 2010, the bank's advances growth was in excess of 27 per cent year-on-year.
As on December 2010, Bank of Baroda's capital adequacy ratio stood at 12.45 per cent with Tier-1 ratio working out to 7.7 per cent (less than the RBI's comfort level of 8 per cent). This capital infusion will improve the capital adequacy ratio of the bank to 14.1 per cent (considering December 2010 financials), while the Tier-1 ratio of the bank would improve to 9.4 per cent.
Additionally, the bank would be able to raise other hybrid Tier-1 capital instruments (preference shares and perpetual debt) and Tier-II instruments, post core equity infusion.
net interest margin
The current capital infusion will help Bank of Baroda protect net interest margin (NIM) better than its peers given the tight liquidity scenario and short-term deposit rates ruling close to the highs last witnessed in 2008.
The other advantage for Bank of Baroda is that its domestic credit-deposit ratio of 70.5 per cent as of December 2010 is lower than the 75 per cent for the banking system as a whole. This gives the bank enough cushion to fund credit growth without raising deposits aggressively, thereby, protecting the margins to some extent.
The domestic net interest margin for the quarter ended December 2010 improved to 3.82 per cent as against 3.4 per cent in the previous year.
The dilution of equity is high at 10 per cent post-preferential issue. However, given that the earnings may grow at more than 10 per cent, this issue may not be earnings dilutive for existing shareholders.
Additionally, the long-term target of the Government is to maintain the stake at 51 per cent which would mean that the bank can raise further capital without going back to the Government for money.
Our analysis shows that the bank can maintain at least 25 per cent growth in risk assets (advances) without raising any tier and Tier-II instruments for another two years.
The stock gained 1.2 per cent on Monday, while the NSE Nifty index lost 1.36 per cent.
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