"Sustained Performance in Challenging Environment "

M. D. Mallya
Chairman & Managing Director

Dear Stakeholder,

I am pleased to report that the year 2011-12 (FY12) was your Bank's fourth consecutive year of record income and profits post the global financial crisis. Once again, your Bank’s performance has shown its resilience to economic volatility and proved the credibility of its business model and strategies. It gives me immense happiness to present before you the Annual Report and Financial Statements of Bank of Baroda for the year ended 31st March, 2012.

It is appropriate at the outset to review the business environment within which your Bank operated during the year under consideration.

ECONOMIC REVIEW

The year FY12 has been challenging for the Indian economy. After two years of a fairly robust growth of 8.4%, India’s GDP growth is estimated at 6.9% for FY12 by the Central Statistical Organisation, Government of India. While agriculture and services sectors maintained good growth momentum during FY12, industrial sector slowed down sharply, led by the contraction in mining and manufacturing segments. Capacity utilization rates in various infrastructure industries, especially in cement and thermal power sectors declined significantly during FY12.

The Reserve Bank of India’s (RBI) monetary tightening continued with full vigour for most part of the year in response to the untamed inflationary pressures. The headline (WPI) inflation averaged around 8.8% for the full year. Gradually, high levels of inflation gave way to a slowdown in the growth.

After the boom in capital inflows during FY11, rising global risk aversion and certain domestic concerns reduced the flows of capital. For instance, the portfolio inflows declined from US$ 32.2 billion in FY11 to US$ 18.9 billion in FY12. The rupee depreciated the most among major Asian currencies during calendar 2011 partly contributed by India’s widened current account deficit, primarily driven by high crude oil prices. India’s foreign exchange reserve position dwindled to US$ 295 billion by end-Mar, 2012 from a high of US$ 321 billion in early Sept, 2011.

While the demand for non-food credit of scheduled commercial banks (SCBs), especially term loans remained lacklustre for most part of FY12, the deposit growth too decelerated in the fourth quarter of FY12 reflecting tight liquidity conditions. After raising the policy rate by 375 basis points, the RBI took a pause in Dec, 2011 citing rising downside risks to growth.

Fragile economic environment, growing stresses on asset quality and depleting capital adequacy made several SCBs prefer government securities to commercial credit.

During FY12, India’s fiscal deficit increased to 5.9% of GDP, much in excess of the targeted 4.6% due to increased fuel subsidies and employment creation schemes.

In short, the year FY12 was marked by interplay of several external and internal economic issues that impinged significantly on local businesses, in general, and the banking sector, in particular.

BANK OF BARODA : Again Proved the Resilience of its Brand in FY12

Notwithstanding the challenging environment, your Bank was able to exploit the opportunities within the given environment and sustain its qualitatively superior performance during FY12.

Your Bank posted a very healthy growth of 25.9% in its global business – way above the banking industry’s average performance. On the back of healthy growth of 17.2% in its Net Interest Income, the Bank recorded Net Profit growth of 18.0% despite adverse pressures on Net Interest Margins (NIMs).

Your Bank’s Return on Average Assets (ROAA) at 1.24%, Capital Adequacy at 14.67% and Return on Equity at 19.04% again provided an eloquent testimony to the financial soundness of your Bank.

Moreover, your Bank again proved its strength in the asset quality management by restricting its Gross NPA ratio at 1.53% and Net NPA ratio at 0.54% during FY12 – one of the lowest in the large sized banking segment in India.

Strategic Initiatives during FY12

With the aim to strengthen its business foundations, your Bank undertook several strategic initiatives during FY12.

After successfully migrating Data Centre to a new Data Centre in the Bank’s own premises, your Bank expanded its Disaster Recovery Centre during the year to ensure uninterrupted banking services. Your Bank took various technology initiatives like windows server virtualisation, desktop virtualisation and backup consolidation as green initiatives and also to improve Data Centre’s operational efficiency. Besides, your Bank’s wide network was migrated to new technology based on Multiprotocol Label Switching (MPLS) for improving uptime and on demand upgrade. The Enterprise Management System too was upgraded and new modules were deployed to effectively manage and monitor your Bank’s growing IT infrastructure.

In order to provide superior internet banking experience to its customers, your Bank migrated the Core Banking System (CBS) to higher version with enhanced features. Additionally, various new modules like Fixed Assets Maintenance, Sales Tracker Module, Centralized Service Tax, Bank Realisation Certificate (eBRC) Module, Account Number Portability and Workflow Automation for New Pension Scheme, Swavalamban, were implemented during the year under review. All CBS branches of your Bank are enabled for interbank remittances through RTGS and NEFT which have also been interfaced with your Bank’s internet banking portal.

Your Bank continued to add more facilities under its Internet Banking channels. The Internet Banking -- Baroda Connect -- now provides speedy and secured facility to transfer funds to self, third party (within the Bank) and inter-bank. The SMS Alerts, RTGS/NEFT transactions are also provided in your Bank’s internet portal. The ASBA (Application Supported by Blocked Amount) functionality has been introduced in Baroda Connect for online subscription to Initial Public Offers (IPOs) and Follow-on Public Offers (FPOs) to facilitate application for equity shares.

Your Bank added more facilities to the Mobile Banking channel through Baroda M-Connect viz. Balance Enquiry, Mini Statement, Linking of Multiple Accounts, Fund Transfer, Bill Payments, Ticket Booking, Shopping, Feedback/ Complaints etc.

By 31st March 2012, your Bank’s ATM network expanded to 2,012. The ATM switch is now integrated with seven interchanges viz. National Switch NFS (NPCI), Visa, MasterCard, CBUAE (UAE), CBOMAN (Oman), Link (T&T), Paymark (New Zealand) to provide convenience to customers by increasing delivery points through ATMs. With a centralized depository application, your Bank’s branches are now equipped to provide depository services for both NSDL as well as CDSL. With Online Trading System, your Bank will be able to provide a complete suite of online services to customers for trading in instruments like equities, mutual funds, bonds and initial public offering (IPOs).

Additionally, your Bank took several other IT related initiatives such as Internet Payment Gateway services for debit cards/credit cards, Cash Management System covering services like Receipt Management (Collections), Payment Management and Invoice Management (Receivable and Payable Management), Payment Messaging Solution (PMS) {that was implemented in 20 overseas territories and all authorised branches in India}, a grid based Cheque Truncation System (CTS) {implemented in NCR-New Delhi, Chennai, Coimbatore and Bangalore}, and initiation of an Automated Cheque Processing Centre (Inward & Outward) in Mumbai.

Your Bank also implemented the Human Resource Networking for Employees Service with the objective of creating a central database of Bank employees for facilitating speedy decision-making, promotion and selection exercise as also for automating other HR process.

Moreover, your Bank undertook measures to create Data Warehouse for providing flexible and interactive source of strategic information, Customer Relationship Management for better customer insight and uniform customer view across channels.

During the year FY12, your Bank took some major initiatives in its Retail Banking segment. It launched the BarodaFirst Wealth Pack, a combo of two products namely BarodaFirst Savings Bank and BarodaFirst Regular Deposit jointly with two Insurance Products namely ULIP & Term Insurance Plan. It also designed Baroda Samriddhi Quarterly Recurring Deposit and Baroda Samriddhi Half yearly Recurring Deposit Schemes meant especially for Agriculturists, Self Employed and Professionals.

A Sales Operating Model was rolled out at 163 Baroda Navnirman Branches {i.e. your Bank’s project in Business Process Reengineering} for developing Sales & Service culture to generate business leads through transitioning service requests to sales conversation and data mining of existing/new profitable customers.

To accelerate the pace of Savings Bank Deposits accretion – a tough challenge in rising interest rate scenario - your Bank launched several Savings Bank Deposit campaigns with incentives to the performing staff, such as “Evening with CMD & Picnic with Staff” for award winning Branches and Regional Offices.

Your Bank also launched a number of Retail Loan campaigns during the year to augment its Retail Loan Book with a special focus on Home Loans and Car Loans. Your Bank opened nine City Sales Offices one each at Haldwani, Raebarely, Faizabad, Raipur, Bhopal, Indore , Bengaluru, Ghaziabad and Rajkot. Going by the solid success of this lending model, three new Retail Loan factories were opened at Haldwani, Dehradun and Nasik by your Bank in FY12.

Understanding the need to redesign business strategies to incorporate specific plans to promote financial inclusion of low income group, treating it both as business opportunity as well as corporate social responsibility, your Bank made use of available resources including technology and business expertise and took concrete steps to promote the causes of Financial Inclusion during the year under review. The Financial Inclusion (FI) data and transactions were integrated to the CBS through an FI Server/Gateway of the service provider, kept in the Data Centre of the Bank. Your Bank issued Smart Cards to customers after uploading their accounts in CBS and effecting KYC verification by the link branches.

Your Bank tied-up with National Institute of Rural Development (NIRD), Hyderabad for designing and conducting special training program for its officers on FI. For increasing the pace of FI, your Bank introduced Mobile Banking vans, having connectivity to CBS through CDMA technology. Five such Vans (1 in Gujarat, 2 in UP, 1 in Bihar and 1 in Goa) have been made operational, which are covering 41 villages. Your Bank has already covered 100.0% villages allotted to it under the FI project. More than 7.61 lakh FI accounts were opened in these villages as against the target of 7.10 lakh.

To ensure adequate contribution of the Bank in meeting farmers’ demand for agricultural credit and other financial needs of rural India, your Bank designed various products and business strategies during the year under Rural and Agriculture lending. It identified 450 Thrust Branches across India to enhance Agriculture lending. As many as 22 area specific schemes were formulated to increase agricultural lending.

During FY12, your Bank opened ten more Baroda Swarojgar Vikas Sansthan (BSVS), the institutes for training the youth and imparting knowledge and skills required for taking up self-employment ventures, taking the total number of BSVS to 46. Thus, each of the Bank’s Lead Districts has now a R-SETI as per the government guidelines. Moreover, Ajmer BSVS centre has been exclusively developed for women entrepreneurs. During FY12, 42,786 youth beneficiaries were trained out of which 25,791 have established selfemployment ventures. Out of the total 1,22,228 beneficiaries trained by these centers so far, 75,050 have established their self employment ventures. Your Bank opened 21 new Financial Literacy & Credit Counseling Centres (FLCC) christened as “SARATHEE” during the year under review, taking the total number of FLCCs to 39 as on 31st March 2012.

The Micro, Small and Medium Enterprises (MSME) segment is a key source of economic growth and employment in India as in other parts of the world. Your Bank took several initiatives under MSME Business during the year under review. It opened ten New SME Loan Factories and eight New SME Specialized Branches during FY12. Also, your Bank introduced five new customer-centric area specific products to suit the local cluster needs. Bank introduced a new asset side product named as “Baroda Channel Financing” on a pilot basis.

Your Bank sponsored workshop on “Management Skills to Source Financing and Management of Technology by SMEs” for entrepreneurs arranged by All India Management Association (AIMA) at Hyderabad, Ahmedabad and Jaipur. Your Bank even introduced “Baroda Entrepreneur Awards” for Micro & Small enterprises.

Additionally, your Bank released a Booklet named as “Practical guide to Becoming An Entrepreneur”, inter alia, giving information on the Bank’s SME products and “Frequently Asked Questions” on Credit Guarantee Fund Trust For Micro And Small Enterprises (CGTMSE) scheme. Your Bank also signed a MoU with four different Credit Rating Agencies during FY12 for rating of SME accounts.

Business and Financial Achievements in FY12

As described earlier, your Bank delivered another cheery performance during FY12 despite difficult economic environment. As in the past three years, your Bank’s performance on the business front was comfortably above the banking industry’s average performance.

Your Bank’s Global Business touched the mark of Rs 6,72,248 crore in FY12 posting a growth of 25.9% (y-o-y). In its Indian operations, its Deposits and Advances increased healthily by 20.1% and 19.3%, respectively. Your Bank’s Domestic Low-cost or CASA deposits grew by 15.9% (y-o-y) notwithstanding higher interest rates on retail term deposits and formed 33.2% share of the total Domestic Deposits in FY12.

Your Bank’s Priority Sector Credit too recorded a decent growth of 19.5% during FY12 and formed 43.37% of its Adjusted Net Bank Credit (ANBC), comfortably surpassing the mandatory requirement of 40.0%. Your Bank posted a growth of 26.1% in its SME credit, 18.4% in Farm credit, 24.9% in Direct Agriculture credit and 10.0% in Retail credit reflecting a well-balanced growth across different sectors in tune with opportunities available within the system.

During FY12, the Total Business of your Bank’s Overseas branches registered a robust growth of 44.6%. In Overseas Operations, your Bank’s Customer Deposits increased healthily by 40.4%, Total Deposits by 45.2% and Advances by 43.9%. Supported by steady and better than industry average spreads and a good pool of fee-based income, your Bank’s Gross Profit in Overseas operations posted a healthy growth of 48.5%.

It may be noted that your Bank’s Overseas Business contributed 28.3% to its Global Business, 20.7% to Gross Profits and 34.0% to Core Fee-based Income. Besides, the Total Assets of the Bank’s Overseas Operations increased from Rs 91,273 crore to Rs 1,28,398 crore registering a growth of 40.7% during the year FY12.

For the Bank as a whole, Gross Profits recorded a healthy growth of 23.6% to Rs 8,630.37 crore. Despite increased provisions, a stable momentum in Net Interest Income (NII), a good traction in non-interest income and a controlled growth of operating expenses raised your Bank’s Net Profit in FY12 by a rich 18.0% (y-o-y) to Rs 5,007 crore, much above the street expectations. While, NII increased by 17.2% (y-o-y), Other Income (or Non-Interest Income) grew by 21.8% (y-o-y), primarily driven by impressive treasury gains and strong recovery from the written off accounts.

Despite an ongoing cyclical downturn, your Bank maintained one of the best asset qualities in the banking arena by the end of FY12. In line with its past record, your Bank succeeded in restricting its Gross NPAs to 1.53% and Net NPAs to 0.54% during FY12. The Bank’s Loan Loss Coverage Ratio (including technical write-offs) too stood at the pristine level of 80.05% as on 31st March 2012.

In the domain of shareholders’ return and liquidity ratios, your Bank delivered better than its market guidance and maintained Return on Average Assets (ROAA) at 1.24%, Earnings per Share (EPS) at Rs 127.84 and the Book Value per Share (BVPS) at Rs 637.37. Furthermore, your Bank’s Cost-Income ratio sharply declined from the previous year’s level of 39.87% to 37.55%, reflecting its consistently improving earnings profile and a prudent control over operating expenses. Your Bank’s Capital Adequacy Ratio under Basel-II reached a sound level of 14.67% comprising 10.83% as Tier-I capital ratio as on 31st March 2012 – again one of the highest in the state-owned banking segment.

Looking Forward

While India’s growth remains relatively high in the global context, various factors, including the unsettled global outlook and domestic policy concerns, have weighed on investment. Inflation has started moderating primarily on account of a favourable statistical base giving way to a modest decline in lending rates. Growth for FY13 is projected between 7.0% and 7.3% by various noted agencies, while risks from slow progress on policy front, high & volatile inflation and the global situation – remain on the downside.

While your Bank’s overall business strategy during FY13 will evolve in response to the emerging macroeconomic environment, your Bank’s well capitalized balance-sheet and robust business model would, no doubt, enable it to sustain its consistent performance in the coming years also.

During FY13, your Bank will continue to expand its market share in both deposits and advances by exploiting its geographic & strategic advantages and capital strength. As in the past, your Bank will focus on maintaining a high growth in domestic CASA deposits. Your Bank will leave no stone unturned in maintaining its asset quality in terms of low NPA ratios. Your Bank’s policy of maintaining healthy Provision Coverage Ratio year after year will certainly help it face any adverse economic situation with strength.

It may be noted that for maintaining and further improving the asset quality of the credit portfolio, your Bank has put in place an effective mechanism for ensuring expeditious review of accounts, compliance of terms and conditions and up-gradation in credit ratings in high value advance accounts.

Aided by its sustained high profitability, your Bank will continue to maintain sufficiently high CRAR and Tier 1 ratios in the coming years also. As your Bank has been maintaining healthy Capital Adequacy Ratio with common equity constituting around 93% of Tier I Capital as at end March 2012, its transition to Basel III regime would be extremely smooth.

Human Resource strategies have been a key component of your Bank’s overall efforts for business transformation. Your Bank is already endowed with a competent and highly motivated employee base, yet it has initiated an innovative resourcing channel with Manipal Global Education Services. A newly set up Baroda Manipal School of Banking is expected to provide trained officers to your Bank, who shall be deployed against its specific requirements.

During FY12, your Bank took several steps to revamp its existing HR processes, structures and policies in order to support its technology-led business transformation.

A focused HR transformation project – ‘’SPARSH” has been introduced to achieve this goal. Various initiatives taken by your Bank such as Talent Management, Succession Planning, Creating a Scientific Staffing Model & Manpower Planning, Development & Capability Building and Performance Management will produce substantial results going forward enabling your Bank to successfully address tough business challenges.

Today, the major differentiator amongst the banking service providers is the quality of customer service. Your Bank enjoys the patronage of over 45 million global customers. Your Bank is committed and focused towards providing excellent Customer Service through all delivery channels and has been making continuous efforts for enhancing the level of customers’ satisfaction by leveraging technology to provide e-products and alternative delivery channels best suited to the diverse needs of different customers. The varied interests and expectations of customers will be taken care of by further improving upon the various processes and procedures.

Bank’S Corporate Goals and Strategy

Your Bank has articulated “Business Growth through Higher Productivity, Efficiency and Profitability” as the motto for the year FY13.

During the year FY12, your Bank introduced its Brand in Sonic Medium by launching a “Signature Tune” on the occasion of its Bank’s Foundation Day on 20th July, 2011. The prime purpose was to highlight the spirit of the Bank as a vibrant and energetic organization complementing the Logo. Your Bank will draw its mileage in positioning it strongly in the global market.

Your Bank’s Project Navnirmaan has various components covering both Business Process Re-engineering and Organization Re-structuring, aimed at transforming the Bank’s branches into sales and service centres through sustained centralization. This is expected to make achieve sound sales growth, superior customer experience and alternate channel migration. Your Bank has plans to convert all its metro and urban branches into BarodaNext (i.e. a branch where BPR is rolled out) within a stipulated timeline. The initial impact of BarodaNext migration has been found to be rewarding both in terms of increased customer satisfaction and CASA growth. Creation of automated and lean Back Offices like City Back Office and Regional Back Office on a wider scale will certainly improve the efficiency and productivity of the Bank’s human resources. Your Bank has already established two Contact Centres (i.e., Call Centres) one each at Lucknow and Baroda.

To sustain sales growth, a new Sales Operating Model has been rolled out in certain identified branches of your Bank. Your Bank has started opening Mid-corporate branches to ensure focused credit dispensation to this specific segment of wholesale business. Further centralization initiatives are going to be piloted soon to enable these branches to become a “Sales-cum Service Outlet”.

Your Bank’s consistent and stable performance across all business and financial parameters and superior leadership has earned it the approval of various national and international organizations during FY12.

Amongst several awards, in particular, your Bank has received the awards like Best Public Sector Bank (PSB) by CNBC-TV18 & MCX; the Golden Peacock Award for Excellence in Corporate Governance by the Institute of Directors & World Forum for Corporate Governance in London; the Dainik Bhaskar India Pride Award for 2011; the Most Efficient Bank in Kenya; the Best Initiatives in Inclusive Banking – FIBC Banking Award; the Dun & Bradstreet’s Leading PSB in “Global Business Development Category”, the National Award for Performance under the SME Business; the Award for Best Utilisation of Intellectual Resources; the Best Growing Large Bank by the Business World-PWC; the Business Leadership Award by NDTV- Best PSB in 2011; the Award for Excellence in Financial Reporting by the ICAI in PSB category; the Fastest Growing Large Bank by Business World-PWC; the UTV-Bloomberg Financial Leadership Award and the FM Stars Industry Brand Leadership Award.

Furthermore, your Bank’s Brand Ranking increased by 47 notches in just a year’s time in the Top 500 Banking Brands by The Banker, London during FY12.

Your Bank wishes to protect its superior performance in the year FY13 also to earn awards for exceptional performance. So, it will try to maintain its position in terms of sound financial health, service excellence, strong corporate governance, desirability as an employer and solid contributions to national development.

In all its core businesses, your Bank has put strategies in place that seek both to address near-term challenges and to seize opportunities to strengthen its platform for the future.

In this exciting journey of your Bank, I solicit your continued support and patronage.

M. D. Mallya
Chairman & Managing Director