Bank of Baroda: Hold

Recommendation: Hold

N. S. Vageesh

THE list of public sector bank stocks commanding market interest has been limited. Bank of Baroda belongs to this category, although the stock seems to have hit some rough weather during the past year.

From a high of around Rs 86 a year back, the stock touched a low of Rs 35 in mid-May and has been hovering in the Rs 40-45 range recently.

The sentiment for banking stocks has been lukewarm following gyrations in the forex market, hike in interest rates and consequential effects on the investment portfolios of banks. A rough calculation indicates that it may have to provide around Rs 250 crores for depreciation of its investment portfolio. Seen in the backdrop of a net profit of Rs 502 crores it earned last year and Rs 750 crores that it hoped to earn this fiscal, market apathy for the stock can be partly explained.

Bank of Baroda is the largest nationalised bank in the country, second only to the State Bank of India in size and reach. Yet, like other peers in the public sector, the bank has been lagging behind in computerisation, a hangover of commercially unviable branch expansion in certain rural areas and the opposition from unions in the past. What ground Bank of Baroda has to cover can be seen from the fact that it has computerised less than 20 per cent of its 2,650 branches and 50 per cent of its business volumes so far.

The bank is now beefing up its technology infrastructure and hopes to meet the CVC guideline of computerising at least 70 per cent of its business by March 2001. Other initiatives in the recent past include a smart card launch, phone and Net banking project and steps to improve connectivity on a limited scale among its branches. These measures will be expanded nationwide in phases in the coming two years. The bank has earmarked around Rs 250 crore for this purpose. Concurrently, it has introduced a cash management product, which should redress partly what has been a chink in its armour. The bank has been a late entrant in this business and has possibly lost significant ground to players such as Corporation Bank, HDFC Bank, ICICI Bank and Citibank.

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The bank turned in a 16.5 per cent growth in net profits at Rs 151.78 crores in the first quarter of this fiscal. Whether it will be able to maintain this pace in the next two quarters, given recent developments, remains to be seen. Asset quality concerns remain, although they are a shade muted by management claims of a 20 per cent improvement in recoveries this fiscal. NPAs, as of March 2000, were at 6.95 per cent.

The bank's capital adequacy ratio at 12.1 per cent, as of March 2000, seems comfortable. Further resource raising may, however, be necessary to fund its technology initiatives, foray into insurance, the possibility of increased credit offtake over the next one year, and tightening prudential norms.

The bank can still draw some funds through the tier-II route. An equity expansion in the immediate future seems remote, given current market conditions and the management's stated intention of waiting for valuations to improve before raising resources abroad. The firming up of an ADR plan as well as making headway with its IT plan may well prove to be a trigger for the stock as has been witnessed in the case of ICICI and ICICI Bank. Existing investors can stay invested for a couple of months more to book profit.