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Suresh Krishnamurthy

Mr P. S. Shenoy (left), Chairman and Managing Director, with Mr A. K. Khandelwal, Executive Director... Hoping for the good times to last.

SHAREHOLDERS of Bank of Baroda can consider reducing their exposure to the stock in the course of the next few weeks.

The stock price now trades at levels that require consistent growth in dividends over the next five years. Growth in the next year may pose no problem, but beyond that may be difficult to achieve.

The stock price factors in positive developments such as return of capital to the Government. However, negative factors such as possible compression in spreads are not adequately reflected in the stock price.

Bad loans decline

Bank of Baroda's (BoB) performance in the fourth quarter and the year ended March 2003 has largely been aided by containment of bad loans. This had a salutary effect on the provisions for such loans.

In the fourth quarter ended March 2003, provisions were lower by 46 per cent compared to a 12 per cent increase in operating profit.

In the year ended March 2003, provisions increased by 6.3 per cent while operating profit rose by 31 per cent. The net non-performing assets to net advances ratio is also down at 3.72 per cent.

BoB is targeting to reduce the ratio to 2 per cent at the end of March 2004. Such a decline will again reduce the need for provisions enhancing profit growth.

Insipid business growth

However, in terms of business growth, BoB's performance was not impressive. BoB's total advances rose by 5 per cent and deposits 7 per cent. This is much lower than the double-digit growth recorded by banks such as Punjab National Bank, Oriental Bank of Commerce and Corporation Bank.

The lower growth appears to be mainly due to lower growth in retail assets for BoB. In the case of most public sector banks, proportion of retail advances had crossed the 15 per cent level at the end of March 2003. However, retail assets accounted for less than 10 per cent of total advances for BoB.

Lower business growth reflects poorly on BoB's ability to counter competition. If the trend persists, its valuation will suffer.

Capital thrust

Despite relatively inferior business growth, BoB is set to record reasonable growth in profits in 2003-04. Similar to most public sector banks, BoB too is sitting on a pile of unrealised gains on its portfolio of government securities. Credit growth for the entire banking sector is also showing signs of picking up. In fact, the bank management has set a target of 35 per cent growth in profits for the year ended March 2004.

The bigger issue is, however, that of return of capital to the Government. The management has indicated its intention to return Rs 92 crore worth capital to the Government. If this happens, it would boost growth in per share earnings to 100 per cent in the year ended March 2004. It would also lead to a similar rise in the book value of the stock.

The BoB stock now trades at a dividend yield of 4.5 per cent and at 1.25 times its book value adjusted for non-performing loans. If capital were returned to the government, the valuation would look even more attractive.

However, factors such as a significant decline in income from government securities a couple of years down the line is not reflected in the stock price. In this context, firm trends in share price in the next few weeks need to be utilised to book profits.

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