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Saturday, March 12, 2011

Large cap stock analysis-Bank of Baroda

Bank of Baroda (BoB) is a state owned bank with operations in 26 countries. Let's have a look at it's stock analysis to figure out why it is a good large cap stock to buy from public sector banking space.
The bank has significant overseas operations and portfolio. Bank primarily operates in Gujarat and Maharashtra. Almost one third of its branches are in these two states. Off lately, Bank of Baroda is increasing its network in other states of country as well. Bank has 3,200 branches and is planning to add another 300 by March 2012. It also has centralized banking system in almost all of its branches in India.

Lending portfolio of Bank of Baroda comprises mainly of large corporate loans. Retail, small and medium enterprises and mid-corporate segments are the growth drivers bank management is targeting for future growth. BoB also earns revenues from other sources such as guarantees and letters of credits to earn commissions on it. The bank also sells third-party products and gold coins. It had reported a 14% rise in other income.

Stock Financials:
Net profit of bank has grown at average 31% y-o-y for the past four quarters due to high net interest income growth. Net interest income for bank grew by average 32% in the same time. It is the difference between interest earned and interest expended by the bank. Net interest margin, one of the very important parameter for profitability of any bank, was at 3% for the past three quarters. Almost 96% of the bank's assets are based on floating rate so rise in the borrowing costs is passed on to borrowers and bank can maintain its Net Interest Margin.

Net non-performing assets (NPA or bad loans) are at only around 0.3-0.4% for the past eight quarters. In near future, most public sector banks are expected to report higher bad loans by using system-based bad loan recognition. BoB is already recognizing all bad loans through the core banking system so it would not have any big surprises when other public sector banks declare their system based bad loans.

Future Growth Prospects:
Government has decided to infuse fresh capital in nine public sector banks including Bank of Bardoa. A higher capital availability would provide a cushion for potential losses and would protect lenders of the bank. The bank is in better position to maintain its operating margins as all its loans are linked to the base/prime-lending rate. Bank has a 36% share of current and saving account balances. This helps the bank in lowering the impact of rising interest rates.

Stock Valuations:
At current stock price of Rs.892, the stock trades at 2.1 price to book value (P/BV) which shows fair valuation considering its growth potential. The bank has better asset quality (loan portfolio) than most other banks which makes low risk and a good bet for investors. One may consider to buy stocks of Bank of Baroda for long term investment portfolio.

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