Bank of Baroda

Bank of Baroda is likely to emerge as a much stronger player. Investors can invest in the stock with a long-term perspective

Beta: 1.06
Institutional holding: 38.0%
Current dividend yield: 2.9%
Current P/E: 6.5
Current m-cap: Rs 10,035.6 cr

WITH A network of over 2,800 branches across the country, Bank of Baroda (BoB) is one of the largest public sector banks in India. The bank has been growing rapidly in the last few years, and it closed FY '08 with 46 branches in abroad—a mark that very few banks have achieved. BoB's wide base has helped it to tap all the resources-in rural, semi urban and the metro markets-to grow its balance sheet and revenues. BoB's international advances grew by more than 30% in FY '08, as a result of its wide presence in overseas markets.

BUSINESS

BoB's balance sheet has grown at a compounded average growth rate (CAGR) of 25.9% per annum in '06-'08. And, in terms of the growth trajectory, BoB has joined the fray of the top PSU banks, like, Punjab National Bank (PNB) and Bank of India (BoI).

The turnaround actually started becoming visible in the FY '06, when for the first time in the current decade the balance sheet expanded by close to 20%. Since, FY '06, the bank's loan book has been increasing at a rate in excess of 25%, but the deposits have been growing at a bit slower rate. This has helped it in improving the credit-deposit ratio i.e. a higher portion of deposits is extended as advances.

However, BoB's net interest margin (NIM) has been under pressure as it has come down from 3.4% in FY '05 to 2.9% in FY '08. One may get an impression that this has happened because the bank has not been able to pass on the increase in cost of deposit to its customers. However, this is because the bank had to step up its deposit mobilisation in the last two years in order to maintain high credit growth. This resulted in higher interest payments on account of higher deposits, thereby, compressing the net interest income, which ultimately led to fall in NIM. This shows that there was a trade off between BoB's shrinking NIM and growth in its advances. And, it has paid off, as the bank's profit grew at a CAGR of 30.8% in last three financial years.

The non-interest part of BoB's revenue has not been growing as fast as the fund-based revenue. The bank needs to improve its performance on this parameter. In the six months ending September '08, the bank's profit has grown by 16.5% on a year-on-year basis, propelled by 32.5% growth in its advances. It must be noted that the growth in advances took place in a sluggish business environment.

The NIM was also under pressure in the first half of the current financial period. This is visible as the interest expenses grew by a higher percentage than interest income. However, BoB rationalised its other expenses, and this helped in boosting its profit growth.

The asset quality is very high as the net NPAs formed just 0.43% of net advances at the end of September '08 quarter and on this count the bank's performance is as good as a top private bank. Its capital adequacy ratio stands at 13% and it shows that it is well capitalised.

VALUATION

The stock is trading at a multiple of 6.5 times the trailing twelve months' earnings. The low valuations do not justify the earnings growth, which is much higher. Moreover, the stock is trading at a discount to its book value (Rs 301 per share). A fundamentally sound stock, trading at less than its book value, is often the first to rise when the market starts moving up. Investors are advised to invest in the stock with long-term horizon.