Bank of Baroda (BoB), did several things right in the September quarter, demonstrating a surprisingly strong net interest income (NII) growth and a stable portfolio quality, in what is a clearly tough operating environment. The bottom line numbers were better than what the Street expected, envisioning lower top line and higher provisioning cost numbers. This set off near-universal earnings upgrades.
Combined with the broad brush low valuations that public sector banks have been trading at, this sparked a strong rally in BoB’s stock after the results. The stock is up nearly 11 per cent since and at Rs 819, trades at a reasonable valuation of 1.1 times the FY13 book value per share estimates. However, given the weak economic environment, analysts are largely neutral on the stock.
STRONG GROWTH, MARGINS
Robust growth in NII was due to an unexpectedly strong net interest margin (NIM) performance. Yields on advances improved sharply, by about 50 basis points sequentially, as the benefits of the base rate reset in a rising interest rate environment flowed through, shrugging off the 20-basis points impact of higher deposit costs. This overshadowed the quieter rise in non-interest income (15 per cent sequentially, which was mainly because of a spike in recoveries from written-off accounts.
| ROBUST TOPLINE GROWTH | |||
| In Rs crore | Q2FY12 |
Change (%) | |
| q-o-q | y-o-y | ||
| Net interest income | 2,567 | 11.7 | 25.9 |
| Provisioning costs | 483 | 23.6 | 160.6 |
| Net profit | 1,166 | 12.9 | 14.4 |
| Net interest margin (%) | 3.10 | 20 bps | 5 bps |
| Gross NPA ratio (%) | 1.41 | -5 bps | 2 bps |
| Net NPA ratio (%) | 0.47 | 3 bps | 9 bps |
| Loan loss coverage (%) | 67.10 | -300 bps | -600 bps |
| Provision coverage ratio (%)* | 81.97 | -55 bps | -359 bps |
| *Reported with technical write-offs Source: Company | |||
In another positive, the ratio of costs-to-core income reduced to 39 per cent compared to 41.5 per cent last quarter. However, provisioning costs were up about 24 per cent sequentially and 2.5 times over the same period last year, mainly due to higher loan loss provisioning costs and restricted net profit growth. However, this was accompanied by stable portfolio quality markers. Remarkable, given the tough operating environment and deterioration evident in public sector peers.
OUTLOOK
Analysts, however, are divided on the medium term outlook. Naysayers point to a slim business growth outlook with credit growth slowing and no triggers evident in the near term for the sector at large. Total loans for BoB grew by under three per cent sequentially (24 per cent year-on-year); domestic credit growth was flat sequentially and up about 19 per cent year-on-year. Domestically, advances to the higher yielding SME segment was a major driver (up six per cent sequentially). A deteriorating operating environment could inflict a double whammy from slower credit growth and higher provisioning costs, as quality gets impacted, says an IIFL report.
The bank has also written off gross NPAs aggressively to keep ratios under check, observes IIFL research, adding that BoB Restructured around Rs 660 crore of loans in the quarter. The slippage ratio, as reported, was about 1.2 per cent but would be higher on considering the freshly restructured loan book. Credit costs for the bank are at their lowest, according to Motilal Oswal Research. The brokerage expects limited room for positive surprises and has a neutral call on the stock.
The environment warrants caution for the sector at large believes A V Krishnan of Ambit Capital but says the portfolio quality for BoB has been distinctly better than public sector peers. With a strong Casa base of 34 per cent (marginally better than last quarter) and a fairly stable NIM outlook, envisaging a 10-basis points softening from seasonal dip towards year-end, the stock is a good place to hide in tough conditions, he adds.
