Stock Review: Bank of Baroda

Bank of Baroda (BoB) posted 28.4 per cent year-on-year growth in net profit at `1,069 crore in the December quarter, despite a 25 per cent uptick in provisioning for the new pension scheme and gratuity liabilities.

Consistently robust operational performance boosted net interest income by 43 per cent to `2,292 crore. Noninterest income growth, however, was flat sequentially, with fee income coming in five per cent lower than the previous quarter.

Net interest margin expanded nearly 20 basis points sequentially to 3.2 per cent due to a 17-basis-point increase in domestic book yields and stable deposit costs. The margin expansion was positive given cost pressures and a falling current and saving account ratio (Casa, down 80 basis points sequentially to 35.12 per cent).

Operationally, loan growth outpaced deposit growth by 300 basis points at nearly 33 per cent year-on-year and seven per cent sequentially. The credit-to-deposit ratio expanded 200 basis points sequentially to 73.6 per cent, lower than most peers, giving the bank more leeway for credit growth.

BoB disclosed its actuary estimated new pension scheme liabilities at 2,060 crore (net of earlier provisions), to be amortised over the next five years, which comes to 412 crore per year.

This is unlikely to impact the cost-to-income ratio much, say analysts.

For 2010-11, the management reiterated its earlier guidance of a steady performance, with year-on-year credit growth pegged at 2324 per cent, deposit growth at 20-22 per cent, Casa ratio at over 35 per cent and fee-based income growth at 25 per cent. However, higher deposit costs are likely to put pressure on margins.

Weighed down by tough operating environment outlook for the banking sector, the stock has underperformed the Sensex by eight per cent in the last three months. The additional pension liabilities will pull down earnings estimates, but will put the bogey out of the way. At a price-to-book value of 1.5 times 2011-12 consensus estimates, the stock looks reasonably priced.

Robust credit growth and margin expansion are likely to offset the effects of higher provisioning