Bank of Baroda (BoB) reported slightly lower-than-expected net profit for the quarter ended 30 June. This was largely a function of higher provisioning and margin contraction. Healthy global loan growth and lower restructuring were the key positives of the result. The stock, which initially surged 3.54 per cent post results last Monday against Sensex gains of 1.8 per cent, has marginally trailed the markets since then.
“Despite weaker economic environment, BoB has been able to hold up strongly on its operating parameters namely (1) ability to maintain margins (adjusted for one-offs) (2) no let up on provisioning despite higher slippages and (3) moderate pipeline of restructuring. BoB’s current valuations remain quite attractive at 0.9 times FY13 estimated adjusted book value. Provision coverage ratio of 80 per cent and strong tier-I ratio of 10.1 per cent should provide cushion to the stock. We maintain accumulate rating on the stock with a target price of Rs 800”, Kashyap Jhaveri, Pradeep Agrawal and Aalok Shah of Emkay Global wrote in a post results report on the bank.
Most analysts are positive on BoB given that the stock, at Rs 657, trades at attractive valuations. However, the markets don’t seem to be in a hurry. Some analysts point out there are concerns regarding the bank’s FY13 outlook (subdued) and asset quality, which they believe could weigh on the stock in the near-term.
Domestic loan book, margins under pressure
Healthy net interest income and other income growth fuelled the bank’s top line growth in the June quarter. However, a significant part of other income growth came in from higher recoveries and forex gains and hence may not be sustainable, going forward. Fee income growth remained subdued at 4.1 per cent year-on-year in sync with weakening macro. Its total loan growth stood at 23 per cent on year-on-year (y-o-y) basis, driven largely by global loan book growth. The domestic loan growth came in at 16 per cent, constrained by a subdued growth in retail advances. In contrast, peers in the private space have witnessed strong traction in their retail book. The bank, however, expects to expand its loan book by 1-1.5 per cent higher rate than the overall industry growth in FY13.
| MACRO WOES | ||
| In Rs crore | Q1’FY13 | FY13E |
| Net interest income | 2,798.1 | 11,888.9 |
| Y-o-Y change (%) | 21.8 | 15.2 |
| Total income | 3,568.9 | 15,376.3 |
| Y-o-Y change (%) | 22.0 | 11.9 |
| NIM (%) | 2.7 | 2.6 |
| Y-o-Y change (bps) | -14.0 | -20.0 |
| Net profit | 1,138.9 | 5,427.7 |
| Y-o-Y change (%) | 10.3 | 8.4 |
| Loan growth (%) | 23.0 | 19.3 |
| Gross NPA (%) | 1.8 | 1.9 |
| Price/Book value (x) |
- | |
BoB’s net interest margin (NIM) stood at 2.73 per cent, contracting both on y-o-y (down 14 basis points) as well as sequential basis (11 basis points; adjusted for one-offs in March 2012 quarter). Higher cost of funds, coupled with lower yields on advances, impacted the margins. Further, a 169 basis points dip in the low-cost current account savings account (CASA) ratio to 32.2 per cent also put margins under pressure.
Asset quality woes
The bank witnessed further pressure on its asset quality. Both its gross non-performing assets (NPAs) and net NPA ratios increased sequentially, as well as on a y-o-y basis. This is the third quarter in a row that the bank has seen rising slippages.
A large part of this stress came in from agricultural and small and medium enterprises (SME) loans. While some part of this rise is seasonal, the asset quality stress isn’t over yet for the bank.
The silver lining came in the form of relatively lower restructuring, unlike other public sector banks that witnessed significant increase in the same. BoB’s management indicated the restructuring pipeline had relatively lesser accounts and expects this metric to improve going forward. If the trend persists it could help improve its performance as well as sentiments towards the stock.
Notably, BoB made aggressive provisions towards bad and doubtful debts (up 128.6 per cent y-o-y), which though impacted its bottom-line growth. Its provision coverage ratio stood at a comfortable 79 per cent for the quarter.
