Bank of Baroda – Disappointing Results

Bank of Baroda (BOB) disappointed the street with its Sept 2012 quarter numbers. The bank posted a subdued profit growth, saw a rise in its non-performing assets (NPAs), and a decline in its margins. In addition, one of the key points which emerged from the analyst meet organised by the bank is that its Chairman and Managing Director M D Mallya would be retiring w.e.f. Nov 30, 2012. All these factors have resulted in the share price of BOB falling by more than 3% to Rs 771 per share. The key financial parameters of the bank are as follows:

The Global Net Interest Margin (NIM) of the bank decreased by 2 bps to 2.71% on a sequential basis. However, it declined by 36 bps on a YoY basis. A somewhat similar kind of movement was seen in the Domestic and Overseas NIM of the bank. As on 30th September 2012, its domestic NIM stood at 3.23% and the Overseas NIM stood at 1.54%.

The bank faced serious headwinds on the asset quality front. Its Gross and Net NPAs increased by 57 and 35 basis points to 1.98% and 0.82% respectively on a YoY basis. Even on a sequential basis, the asset quality worsened by 14 and 17 basis points, which is not good for the bank. As on 30th September 2012, its Provision Coverage Ratio (PCR) stood at 75.72%.

As on Sept 30, 2012, the bank’s Capital Adequacy Ratio (CAR) was at 12.91%, lower by 83 basis points on a sequential basis. The Tier 1 CAR stood at 9.57%, which should be considered decent.

For the Sept 2012 quarter, its Net Interest Income (NII) grew by increased by 11.5% to Rs 2862 crore while the Net Profit grew by 11.6% to Rs 1301 crore on a YoY basis. On a half yearly basis, the NII grew by 16.4% to Rs 5660 crore and the Net Profit grew at the same rate of 11% to Rs 2440 crore.

What was positive for the bank was its business growth. The total advances grew by 22% to Rs 292181 crore and the total deposits grew by 24% to Rs 408151 crore, which is way above the industry growth. The RBI has estimated overall advances and deposits growth of 17% and 15% respectively for the banking sector for FY2013.

Taking a segmental view, the Treasury segment witnessed robust growth. Revenues from the same increased by 31% to Rs 2202 crore, while the bank posted a profit of Rs 386 crore against a loss of Rs 44 crore in the similar period last year. Profit from the Retail banking segment saw marginal de-growth and that from Wholesale banking also registered de-growth by 65%.

As on Sept 30, 2012, its branch network (domestic and overseas) stood at 4078. In the second half of FY2013, the bank expects to add 475 branches across India.

Commenting on the results, BoB’s management said, “Despite the uncertain economic environment, our bank has seen improvement in parameters like profitability, productivity and efficiency”. However, in the analyst meet, the management did not hint as to who would be taking up the new role as Chairman and MD for the bank post M D Mallya's retirement. We believe that there is a possibility that with the change in leadership, the bank may post disappointing numbers in the Dec quarter. We may see a rise in its Provision and also witness stress on the asset quality front. This is after in the past we have seen the same with couple of banks like State bank of India and Bank of India which have disappointed the streets after management change.

On the valuations front, the bank is currently available at a trailing Price to Earnings multiple of 6x and a Price to Book Value of 1.1x. Though the scrip is available at cheap valuations, we believe that investors should take a cautious approach as there is a possibility that the price may see a southward move from the current levels. For those who have invested in the stock, we would recommend holding the scrip keeping in mind long term view to garner better returns.