Stock Fundamentals

Weathering tough times: BUY

Radhika Merwin | Updated on March 23, 2013 Published on March 23, 2013

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In spite of slippages on asset quality, the bank retains its inherent lead over public sector peers.

Investors with a two- to three-year horizon can consider fresh investments in Bank of Baroda.

The stock has corrected nearly 23 per cent post its December quarter results, following the surge in loan delinquencies, indicating deteriorating asset quality.

While the next two to three quarters will continue to see asset quality stress leading to additional provisioning costs, the stock has more than priced in the lower earnings growth.

At its current price of Rs 676, the stock trades at a comfortable 0.9 times one-year forward adjusted book value, lower than its historic average of 1.1 times. This offers investors an opportunity to buy the stock.

Bank of Baroda remains one of the better capitalised public sector banks with Tier-I capital adequacy of 9.3 per cent.

While the bank’s gross non-performing assets have gone up significantly to 2.4 per cent of loans, it is still one of the lowest among its peers. The bank’s provision coverage ratio also ranks the highest, at 71 per cent, in spite of unexpected slippages during the December quarter.

Bank of Baroda has grown its assets by a robust 25 per cent annually over the last three years. While the bank boasts a strong domestic presence, it has also been able to widen its footprint in the overseas market.

Sound fundamentals

The bank has a relatively strong presence in industrially advanced regions such as Maharashtra, Gujarat and south India.

It is also widely present among the small and medium enterprise (SME) belts and agriculture segments of Rajasthan, Uttar Pradesh and Uttaranchal.

This has enabled the lender to consistently outperform the banking sector in terms of loan growth over the last three years.

While annual credit growth in the sector between FY2009 and FY 2012 was around 19 per cent, Bank of Baroda’s loan book grew 26 per cent.

It has also consistently grown overseas business operations, which now extend across 24 countries.

From a branch network of 2,899 in FY 2008, the bank has expanded its overseas operations and now has 4,192 branches. Business abroad has thus grown by 36 per cent annually from FY 2009 to FY 2012.

Continuing its momentum, the nine months ending December saw overseas advances grow by a robust 22 per cent, contributing a little over one-third of the entire loan book.

Loan growth trends

In the nine months until December, Bank of Baroda’s overall loan growth slowed 15 per cent year-on-year. Growth was primarily driven by the overseas loan book, while domestic advances lagged, with 11.6 per cent growth.

As the bank mainly lends to large corporates (36 per cent of its loans), the slowdown has led to subdued loan growth.

While the bank has been able to maintain healthy net interest margins (NIMs) on its overseas loans at 1.58 per cent, it is lower than the domestic NIMs at 3.1 per cent. The bank has consistently increased its proportion of overseas loans, and this, along with pressure on domestic yields, has seen the overall NIMs decline 34 basis points on a yearly basis in the December quarter.

As the bank consolidates its overseas loan book, loan growth in FY 2014 is expected to recover to a modest 17 per cent from 15 per cent in FY 2013. We expect the bank to sustain NIMs at current levels of 2.6 per cent.

Deteriorating asset quality

The bank witnessed unexpected increase in slippages in asset quality during the December quarter.

This was primarily due to higher defaults from its restructured loans, which accounted for nearly half of the overall slippages. The gross non performing assets (GNPA) increased 25 per cent sequentially. As of the December quarter, GNPA for the large and medium industries spiked to 3.27 per cent from 1.36 per cent last year. Agriculture and the SME segment registered GNPA of 4.9 per cent and 4 per cent, respectively, from 4 per cent and 3 per cent last year.

The bank added Rs 1,587 crore to restructured loans in the December quarter.

The management expects to restructure around Rs 2,500 crore of loans in the current quarter. This remains a concern.

Downsides limited

The bank’s asset quality is expected to deteriorate further and this will keep the provisioning costs for FY 2014 at 1.2 per cent of loans — significantly higher than the 0.7 per cent witnessed in FY 2012.

However, in spite of such elevated provisioning costs, the stock still trades below its adjusted book value for FY 2014. Even in a worst-case scenario of higher than expected slippages, the downsides seem limited from hereon (see Table).

Published on March 23, 2013
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