Staying ahead of the curve. That?s what Bank of Baroda (BoB) has managed to do reasonably well over the past year or so. The bank can now boast of a good performance across metrics. To begin with, the bank should report a fairly decent growth in the balance sheet. Chairman and managing director, MD Mallya, observes that it should be possible to scale up the balance sheet to Rs 4,05,000 crore by March 2010, from Rs 3,37,000 crore in the year to March 2009, a fairly impressive performance in a difficult year, of around 20%. The CMD is hoping to do even better next year, growing it over 23% to Rs 5,00,000 crore. What?s more, he hopes to do it more profitably.
In the quest for assets, the bank hasn?t lost sight of the net interest margin (NIM); from the recent low of around 2.4% in the June 2009 quarter, the NIM has risen by about 30 basis points to 2.7% in the December 2009 quarter. While not offering too high a rate for deposits, the bank has also matched its assets and liabilities such that it hasn?t lost out. The incremental cost of deposits is lower than the overall cost of deposits so that the bank should have little trouble in a rising interest rate scenario. As brokerage UBS points out, a gap analysis (interest earnings assets -interest earning liabilities) shows that re-pricing over a year is positive and amounts to 14% of interest-earning assets of 2009-10. As such, asset spreads should improve and it?s possible the bank should add around 15 basis points to the NIM in 2010-11. That, together with an increase in the loan book of around 20%, should translate into a rise in the net interest income of close to 24%.
Executive director, RK Bakshi, believes the bank will be able to grow its loan book by about 18% this year. He observes that there has been borrowing across segments including the retail and SME spaces and adds that large companies too have started approaching the bank for working capital. ?Both retail loans and loans to small and medium enterprises are growing at over 20%,? the ED confirms, adding that while a few months back, the demand from larger corporates wasn?t too strong, that too is now picking up. Mallya is confident the loan book should grow by 20%-plus next year. BoB has been able to compete in the market for its share of fees.
Most important, BoB has succeeded in keeping loan losses under control. Indeed, asset quality has been one of the bank?s biggest strengths; stress assets which amount to the sum of restructured assets and net non-performing assets (NPAs), at Rs 4,800 crore, is just 3.4% of the loan book, comparing extremely favourably with other banks. Gross NPAs at 1.43% are lower than the industry average. Besides, the loan loss provisions as a share of loans are expected to be about 0.6% this year indicating that the bank hasn?t taken too much of a hit. BoB, of course, has taken care to make adequate provisions in line with the regulator?s norms and looking ahead, lower provision should help boost profits.
With systemic interest rates expected to move up by anywhere between 125-150 basis points during 2010-11, there is no doubt of some risk of a hit to the bank?s government securities portfolio. At the end of December 2009, the bank?s investment book was close to Rs 60,000 crore. About a fifth of this is in the available for sale category, with a duration of about 2.2, which as brokerage UBS points out, protects the bank to some extent.
In the past, there have been some concerns relating to both profitability as also the use of capital, which analysts believed wasn?t efficient enough. The return on equity (RoE) between 2005-06 and 2008-08 has averaged 15%. Analysts believe this could shoot up to an average of 20% between 2009-10 and 2011-12. However, that should change. Goldman Sachs expects a turnaround in the retail finance market, in particular housing, cars and CVs. Bank of Baroda is well-positioned to cash in on the rising demand for retail loans. The bank?s net profits are expected to grow by about 16% compounded between 2010 and 2012; the pre-provisioning operating profit, however, could rise by a much higher 25-28%.
UBS expects the bank to report an earnings per share of Rs 87 in 2010-11 and Rs 105 in 2011-12 and has set a target price of Rs 675. At Rs 620 levels, the BoB stock trades at 1.4 times estimated 2010-11 price to book (P/BV) and just over 7 times price to equity (PE).