Bank of Baroda

Fresh investments can be considered in the Bank of Baroda (BoB) stock as the valuations look cheap relative to the bank’s growth prospects. The stock (at Rs 327) is trading at a marginal premium to its March 2009 book value of Rs 312 – at a price earnings multiple of 5.3.

Strong growth in advances, diversified branch network and a high proportion of fee income point to good growth potential, while a low proportion of non-performing assets alleviates concerns on asset quality. Given the stock’s performance in the recent rally, investors should accumulate it in a phased manner.

BoB’s recent quarter numbers have bettered expectations, with advances growing by 34.9 per cent for the latest fiscal, topping off a 31 per cent compounded annual growth between 2004 and 2008. The proportion of retail advances has come down from 19.79 per cent last year to 17.9 per cent, while the return on assets and return on equity improved considerably to 1.09 per cent (0.89 per cent) and 19.56 per cent (15.3 per cent) respectively in a year.

For 2008-09, the bank’s net profit grew by 55 per cent, buoyed by better net interest income. Profit growth also received support from a 34 per cent expansion in other income. Within this head, the triple-digit growth of the treasury component may not be sustainable. Domestic net interest margin of 3.21 per cent has improved due to rising yields and the falling cost of deposits. Going forward, maintaining margins at these levels may be a challenge as the lending rates fall at a faster clip than cost of capital. BoB’s low-cost deposit base remains at healthy levels of 34.8 per cent, with bulk deposits falling to 16.9 per cent.

BoB’s recent numbers have also alleviated asset quality concerns, with net NPA ratio falling from 0.47 per cent in FY08 to 0.31 per cent, low relative to peers. The capital adequacy of BoB stands at a comfortable 14.05 per cent, and there is no immediate need for the bank to raise tier-1 capital.

The bank has restructured only Rs 2,659 crore (1.8 per cent of total advances) worth of loans. It may have to incur higher operating costs over the next few quarters as only 66 per cent of its total branches are ‘Core Banking’-enabled, which may pay-off later in the form of higher fee income for the bank.