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The recent decline in the stock price provides a good opportunity for investors to buy the Bank of Baroda (BoB) stock. BoB, a large public sector bank, scores on consistency in operational parameters and low cost-to-income ratios. BoB is better placed than other banks to tide over policy-rate hikes owing to its international exposure and as its asset quality is superior to most. At the current price of Rs 859, the stock is trading at 1.45 times its FY12 estimated book value. The price-earnings (FY12) multiple works out to 6.9 times. BoB has maintained a strong return ratio (return on asset of 1.2 per cent) and has relatively lower outgo on provisioning for employees' pension compared to the other banks.
Around a quarter of the bank's business comes from its overseas branches, which are protected from the steep rate hikes in the domestic market. During March 2011, overseas businesses contributed 32 per cent to the core-fee income and 17 per cent to the gross profits. The cost-income ratio on this business is also low at 19.7 per cent compared with 42.8 per cent for the domestic business.
Better-than-average growth
Bank of Baroda's strong capital adequacy ratio and superior asset quality are other positives. As of March 2011, the capital adequacy ratio stood at 14.5 per cent, partly due to capital infusion by the Government. This infusion will support strong loan-book growth and may aid margins in the near term. BoB's loan book has been clocking higher-than-industry growth, helping it improve its market share in advances. The market share of BoB improved to 4.01 per cent in March 2011 from 3.53 per cent in March 2007. During the same period, the net profit clocked an impressive 42 per cent annualised growth.
Net interest margin (NIM) has improved steadily to 4.16 per cent from 3.5 per cent over the past year. Profit growth was 38 per cent despite a sharp rise in provisions for employees. The domestic NIM of 4.16 per cent is unsustainable, given that 63 per cent of the deposits will mature over the next one year. However, capital infusion and sustenance of overseas margins will protect the overall margins to some extent.
The asset quality of Bank of Baroda is among the best in the public sector with a net non-performing asset ratio of 0.35 per cent as of March 2011. Lower provisioning may partly compensate for other items of cost, thereby protecting profitability.
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