Moving Ahead on Sustainable Performance ...

M. D. Mallya
Chairman & Managing Director

Dear Stakeholder,

It gives me great pleasure to present the Annual Report and Financial Statements of Bank of Baroda for the year ended 31st March, 2010. The Bank’s business and financial performance during the year under review has demonstrated its strength and stability amid uncertain economic environment.

Economic Review

Indian economic environment was fairly mixed and uncertain during 2009-10 (FY10). The first half of the year (i.e., H1, FY10) was overcast by the monsoon failure and a sharp decline in foodgrain production, a continued slowdown in final consumption expenditure, a muted demand for bank credit and a negative growth in both exports and imports.

However in the second half of 2009-10 (i.e., H2, FY10), countercyclical policies, a pickup in the global economy and a recovery in capital inflows helped India overcome an adverse monsoon and see a quick rebound in the economy. Both exports and imports turned positive by November-December, 2009 after contracting continuously for the previous 12-13 months.

The headline inflation (WPI), after remaining subdued during H1, FY10 increased at a faster pace in H2, FY10 and came close to 10.0% (y-o-y) in March, 2010. At the same time, driven by manufacturing and mining sectors, the industrial production recovered from 1.1% (y-o-y) in April, 2009 to 15.1% (y-o-y) in February, 2010. Rapid growth in both inflation and industrial production has prompted the Reserve Bank of India (RBI) to normalise its Monetary Policy and move its focus to “recovery management” from the earlier thrust on “crisis management”.

While the demand for bank credit remained highly subdued and skewed throughout the year under review, credit costs increased for several banks with the maturing of restructured loans. Moreover, higher level of government market borrowings and resultant volatility in bond yields posed tough challenges for the banking industry’s treasury operations.

Bank of Baroda’s Resilience to Shocks

While it is challenging to remain immune to the disruptions created by economic shocks, Bank of Baroda has been able to withstand the turbulence more effectively during FY09 and FY10 mainly due to its strong business fundamentals. Again in the year FY10, the Bank could demonstrate consistent performance by delivering much better quality of earnings, healthier asset quality compared to banking industry with higher provision coverage and lower interest rate risk. It has been steadily improving its market share also. It expanded its global business level by 24.0% (y-o-y) to Rs 4,16,080 crore during the year FY10.

Despite ongoing global economic challenges, the Bank’s international operations continued to remain its mainstay and contributed almost 24.0% to the Bank’s total business and 20.0% to its operating profits in FY10. The Bank’s international business grew by 31.0% (y-o-y) in FY10 without any compromise with credit quality. The Bank’s gross NPA in international operations stood at 0.47% and net NPA at just 0.11% in FY10.

One of the greatest strengths of the Bank over a period of time has been the “trust and confidence” that it enjoys of its stakeholders. Notwithstanding the unprecedented turbulent conditions created by the global economic meltdown during the years FY09 and FY10, the Bank’s stakeholders remained firmly positive on the Bank’s business and financial performance. I am happy to share with you that the Bank too met the stakeholders’ expectations in terms of performance, transparency, corporate governance and integrity in guidance during the last couple of years.

New Initiatives:

During the year under review, the Bank maintained its focus on introducing new business, customer and technology initiatives to further strengthen its operations and leverage its considerable domestic footprint.

The Bank launched a new business process reengineering and organisational restructuring project “Navnirmaan-Baroda Next” on 22nd June, 2009. The project envisages redesigning and streamlining of existing processes and structures including revamp of the branch architecture for better service and sales, higher revenue growth and improved efficiency. The project is primarily designed to optimise on available resources to maximise business and profits and to build a next step for Bank of Baroda, that is, “Baroda Next.”

The Bank achieved 100.0% Core Banking Solution (CBS) for all its domestic branches reflecting the fastest ever roll out of such solutions in the Indian banking industry. The Bank’s CBS branches are enabled for inter-bank remittances through the RTGS and NEFT. Around 94.0% of its overseas business is also covered under the CBS.

By 31st March 2010, the Bank’s ATM network expanded to 1,315. Moreover, “Base 24” has been made fully operational for all domestic ATMs and for ATMs in the Bank’s seven overseas territories. Today, the Bank’s customers enjoy multiple service channels like Baroda Connect (Internet Banking), Phone Banking, Baroda Cash Management Services, NRI Services, Depository Services, etc.

The Bank has implemented an Integrated Global Treasury Solution in its major overseas territories. It has also started providing Online Institutional Trading to its corporate customers. During FY10, many other important technological initiatives were taken in the domain of anti-money laundering, document management system, payment messaging solution, etc.

In order to improve credit flows under the retail business and to consolidate that portfolio, the Bank has realigned its retail bouquet of products. The Bank has also launched a new subsidy-linked housing loan scheme under the Home Loan Product styled as “Interest Subsidy Scheme for Housing the Urban Poor.”

A couple of years ago, the Bank introduced a Retail Loan Factory model as a fast delivery channel for the benefit of its retail customers. Going by the success of this initiative, the Bank opened six new Retail Loan Factories during FY10, taking the total number of such factories to 30.

Leveraging its newly created robust technological platform, the Bank made “Home Loan and Education Loan Application Modules” online during the year under review.

The Bank has always believed in making a difference to the society at large. The Bank took several initiatives on the “Financial Inclusion” front during FY10 to harness the emerging opportunities for rural and agriculture lending. To augment its Agriculture advances, the Bank conducted special campaigns for Crop Loans and Investment Credit. The Bank organized 2,857 Village Level Credit Camps and disbursed Rs 2,484 crore to over 1.9 lakh borrowers during FY10. The Bank identified 450 thrust branches across India to enhance agricultural lending. The Bank formulated various area-specific agricultural lending schemes with various concessions in the rate of interest, charges, etc., in the interest of poor farmers.

Towards the effective use of technology in rural agricultural lending, the Bank has introduced IT-enabled smart card based technology for financial inclusion. With nine additional Baroda Swarojgar Vikas Sansthan (Baroda R-SETI) Centres opened during FY10, the total number of BSVS has gone up to 25. Over two million no-frill savings accounts have been opened so far. As part of the Financial Inclusion Initiative, the Bank has opened four Financial Literacy and Credit Counselling Centres (FLCCs) christened as “SARTHEE”.

Adding its offerings in wealth management products, the Bank has entered into tie-up arrangements with two more leading asset management companies in FY10 for distribution of mutual fund products. The Bank’s joint venture in life insurance, in association with Andhra Bank and L & G (U.K.) – IndiaFirst Life Insurance Co. Ltd. commenced its operation during the year. The IndiaFirst has received an overwhelming response from the Bank’s customers across the country, making the company the fastest growing Insurance company to reach Rs 100 crore premium collections in the first 100 days of its launch.

Business & Financial Performance

The Bank has reported a healthy growth in its business and profits with improvement in all key parameters during FY10.

As stated earlier, its Global Business touched a new milestone of Rs 4,16,080 crore in FY10 reflecting a growth of 24.0% (y-o-y). Both its domestic deposits and advances increased at the above-industry pace of 22.4% and 21.3%, respectively. The Bank’s domestic low-cost or CASA deposits grew by an unprecedented 25.1% taking the share of domestic CASA deposits to 35.63% in FY10 versus 34.87% in FY09. Its Social Sector Advances or Priority Sector Credit surpassed the mandatory requirement and posted a growth of 24.0% (y-o-y). The Bank recorded a growth of 44.0% in SME credit, 27.0% in farm credit and 24.0% in retail credit reflecting a well-diversified growth achievement.

In its overseas business, while the Bank’s deposits grew by 36.0% (y-o-y), its advances grew by 25.0% during FY10. Within total overseas deposits, the customer deposits grew by 33.7%. Total assets of the Bank’s overseas operations increased from Rs 51,165 crore to Rs 68,375 crore registering a growth of 33.6% during the year under review.

The growth in profits was led by healthy topline growth, prudent management of deposit costs and better operating efficiency. The Bank’s Net Profit at Rs 3,058.33 crore for FY10 reflected a robust year-on-year growth of 37.3%.

As the Bank’s primary objective has been to grow with quality, the Bank focused on containing the impaired assets to the minimum possible level. While the Gross NPA in domestic operations stood at 1.64% at end-March 2010, the same for Overseas Operations was at 0.47%. In spite of growing slippages for Indian banking industry during FY10, our Bank succeeded in restricting its global Gross NPA level to 1.36% and Net NPA level to 0.34% by end-March, FY10. While the RBI has extended the deadline for recovery from the Agricultural Debt Relief accounts till end-June, 2010, the Bank has continued to classify these accounts as NPA as a prudent measure. Despite this, the Bank enjoys one of the lowest ratios for Gross and Net NPA in the industry. The Bank’s NPA coverage ratio at 74.90% as on 31st March, 2010 has been comfortably above the norm of 70.0% set recently by the RBI.

The Bank’s Return on Average Assets (ROAA) at 1.21%, Earnings per Share (EPS) at Rs 83.96, Book Value per Share (BVPS) at Rs 378.40, and ROE (Return on Equity) at 22.19% reflect a significant improvement over their previous year’s levels. The Bank’s Capital Adequacy Ratio too stood at the healthy level of 14.36% with the Tier 1 capital at 9.20% during FY10. The Bank’s Cost-Income ratio also eased from 45.38% to 43.57% on year-on-year basis.

Looking Forward

Bank of Baroda’s long standing reputation for financial soundness, long-term customer relationships and proactive management are as important today as ever. Going forward also, the Bank would continue with its thrust on growth with quality. At the same time, it would try to grow above the industry average on the back of strongly positive growth outlook for India in FY11.

The Bank would try to protect or improve further the current levels of its key financials like ROAA, ROE, EPS, BVPS, asset quality, etc., through its dedicated focus on low-cost deposit mobilization & fee-based income, efficient pricing of deposits and loans, reduction in high cost or low yielding bulk business and through improved credit origination and effective credit monitoring.

In all core operations, the Bank has put in place strategies that seek to address near-term challenges as well as to seize opportunities to strengthen its foundations for sustainable growth. The focus of these strategies has been on well-balanced, qualitative growth, service and operational excellence and people management.

In fact, the Bank has been aggressively recruiting the best possible talent in the country from the premier Institutions during the last couple of years. The Bank has been working on the business process reengineering (BPR) project in consultation with the Mckinsey & Co. so as to achieve the optimum use of technology and right skilling of the manpower to yield maximum customer satisfaction. During FY10, the Bank also launched a series of marketing campaigns to promote its brand value. The same would continue in future also, in order to strengthen the Bank’s market share both from the asset and liablity sides.

The Bank has been actively designing strategies for enhancing sales and raising brand equity through continuous market research. The Bank has also focused on evolving a Strategic Mass Communication and Events Plan to ensure brand enhancement. Besides this, significant initiatives in customer education would continue for putting in place an effective Customer Relationship Management system in the Bank.

Bank’s Corporate Goals & Strategy

For the year 2010-11, the Bank has selected the motto “Leveraging technology for augmenting business growth and profitability.”

The ultimate objective of the Top Management of the Bank is to equip the Bank with more stability and growth-orientation. To attain this goal, we have adopted a Business Model that focuses on achieving sustainable growth. This model has four pillars – Healthy CASA, Well-diversified Advances Portfolio, Strong back up of Non-interest income and Stringent NPA Management. The Bank is well geared to ensure that its performance will be driven across all these parameters.

The Bank is aware of the fact that the market leadership can be achieved only through a visionary, strategic and sustainable model of pursuit and perseverance. The success lies in attaining the acceptance of our stakeholders about the Bank’s core values, passion for customer service and the credibility of leaders, which alone would give our Bank a unique place in the banking space. In a bid to gain better market share, we will work relentlessly to provide financial stability and brand value that matters the most.

It will be our endeavour in FY11 to work towards more customer-centricity by upgrading our institutional processes, systems and capabilities. In the current economic environment, prudence and proactive vigilance are most important to convert challenges into opportunities. So, our central focus will be on risk management and growth with quality.

In our pursuit to move towards the top position in the industry, I solicit your continued cooperation and patronage.

M. D. Mallya
Chairman & Managing Director