Bank of Baroda emerges a winner by keeping an eye on all aspects of its performance

IN NUMBERS List of Best Banks in India

The marathon and the sprint both involve running. But the endurance and discipline of a marathoner are very different from those of a sprinter. Marathoners prepare for a run that is a mental and physical endurance test, while sprinters train to give it their all in a brief, intense effort.

Bank of Baroda is definitely a marathoner. Its endurance strategies and disciplined operations have helped it bag the top spot in the 2011 Business Today-KPMG survey of the best banks, up from number four last year. "We have started reaping the fruits of initiatives taken in the last few years," says 59-year-old M.D. Mallya, Bank of Baroda's Chairman and Managing Director, who took charge in May 2008.

WATCH: Bank of Baroda's Chairman and Managing Director M.D. Mallya's interview

The bank's use of manufacturing terminology such as 'factory' and 'sales and service' reflects its off-centre approach. The bank has 42 'loan factories' - hubs where loans are sanctioned - each for retail and small and medium enterprises' lending, across the country. Mallya says the factories helped the bank not only strengthen its credit portfolio, but also improve its quality.

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"People with the right skills under one roof help the bank make better decisions," he says. He emphasises that growth alone is not enough; the quality of growth is equally important. For nearly two years, Bank of Baroda has also been working to transform the way business is done in its branches, through a business process re-engineering project called Navnirmaan.

"The aim is to transform our branches into sales and service centres," says Mallya. Other major aims, he adds, are to spur sales growth through cross-selling (selling additional products to current clients) and deliver a "superior customer experience".

So far, more than 600 of the 1,212 metro and urban branches identified have been rebranded as 'Baroda Next'. All their back office functions have been centralised in a hub, leaving the staff with more time to spend with customers.

But industrial terminology aside, a bank cannot chalk out targets for itself and its employees in quite the same way as a manufacturing company, since the macro environment affects how business grows from quarter to quarter. The BT-KPMG study ranked Bank of Baroda fifth on annual growth of total deposits, seventh on loans and advances, and twenty-sixth in terms of fee income. Mallya acknowledges this, but says his focus is clear: "Between the profit and loss account and the balance sheet, the latter is paramount."

Bank of Baroda beats its peers on operational efficiency. It was ranked ninth on cost-to-income ratio and operating profit per employee, and has the second highest return on capital employed. "We expect our people to contribute to profitability, and not growth in deposits and advances," says Mallya. Equally importantly is the bank's focus on the quality of credit. It has a low non-performing asset, or NPA, growth ratio, and ranks third on this parameter. It is ranked eighth for high NPA coverage, and sixth for its low ratio of net NPAs to net advances.

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At a time when its peers, especially big public sector banks, are struggling with mounting NPA pressures, Bank of Baroda has been reporting lower slippages (loan accounts that turn into NPAs), leading to lower provisioning. It has moved to system-based NPA recognition, which means it will have no slippages from small agricultural loans, something that Abhijit Majumder, Banking Analyst at BNP Paribas Securities Asia, says will plague most of its peers. The bank's restructured loans stood at 4.6 per cent of total loans in September 2011, slightly below the average 4.8 per cent of its peers. The BT-KPMG study indicates that its higher NPA coverage - 74.91 per cent at the end of March 2011, and 81.97 per cent (with technical write-offs) in September 2011 - helps insulate profitability. The stock price suggests that the market is paying attention.

"Bank of Baroda has consistently shown a healthy operating performance and has managed to improve return ratios across interest rate scenarios," Majumder says in a report released in mid-October. "It deserves to trade at a premium to peers, who have shown less discipline while vying for growth and, as a result, are suffering from asset quality issues."

Bank of Baroda has doubled its return on equity over the past five years, which is the key driving force behind the outperformance, according to Rajat Rajgarhia, Director, Research, at Motilal Oswal Securities. "While its current margins are at a five-year high, its ability to maintain strong asset quality when the economic environment worsened locally and globally in the last three years helped it get a premium many times higher than its peers."

Winning strategies Back office functions moved to hub, so branch staff can spend time with customers Emphasis on improving quality of credit portfolio Return on equity doubled over the past five years Good operational efficiency, second highest return on capital employed Higher provisioning than peers for non-performing assets Strong presence in industrially progressive states such as Gujarat and Maharashtra Integrated human resources programme for succession planning, experience and drive

Mallya says he is happy that Bank of Baroda's market share in deposits and advances rose 65 basis points (100 basis points equal one percentage point) from 3.5 per cent in 2008 to 4.15 per cent in 2011. And the bank now plans to take the share up to five per cent in the next three years, for which its top line and bottom line would have to grow 25 to 30 per cent. "Not beyond that," says Mallya. "We need to digest the growth and also ensure that it is qualitative."

Given 12.73 per cent capital adequacy (as of September 2011) and 8.82 per cent Tier 1 capital, Bank of Baroda has headroom to raise Rs 13,000 crore. According to the KPMG study, the bank ranked tenth on capital adequacy, which was 14.52 per cent for the year that ended in March 2011. On Tier 1 capital adequacy, it ranked 11th, with 9.99 per cent. With a three-year compound annual growth target of 25 per cent, Mallya says the bank is not constrained by capital. This is remarkable for a public sector bank in the current economy, where its principal shareholder - the government - is running a large fiscal deficit and could find it difficult to infuse additional equity capital in banks for at least another two years. With 86 offices in 25 countries as of September 2011, Bank of Baroda's international business has a 25.7 per cent share of total business (up from 22.5 per cent in March 2005), and is turning out to be a strong pillar for the bank.

Mallya says international business is predominantly related to India and Indian trade. Buyer's credit accounts for 25 per cent, trade finance 15 per cent, syndicated loans to Indian corporates 30 per cent, and acquisition financing 10 per cent (local assets account for only 20 per cent of all international business). However, international business contributes 19.4 per cent of gross profit and 35.5 per cent of core fee income. "We only do business that we understand well," says Mallya, highlighting that gross non-performing assets from international business are just 0.62 per cent.

On the domestic front, the bank's larger presence in industrially progressive states - for example, Gujarat and Maharashtra account for more than34 per cent of its branch network - has helped it achieve relatively strong business growth despite a slowdown in some sectors over the past few quarters. These states are also a rich source of low-cost CASA (current account, savings account) deposits, which raise branch and employee productivity.

The bank's productivity mantra, though, is Navnirmaan, which Mallya says will redefine banking, and increase the emphasis on cross-selling. With its subsidiaries - IndiaFirst Life Insurance and Baroda Pioneer Mutual Fund - Mallya's dream is to ensure that every financial need of Bank of Baroda customers can be met within the bank. "Our aim is to leverage our branch network better, to increase fee income," says Mallya.

And to do that better, the bank has an integrated human resources programme spanning recruitment, retention, incentives, training and succession planning. Such words were not bandied about in public sector enterprises a decade ago. Inconsistent recruitment is a common weakness of public sector banks, but Bank of Baroda has been on the ball, hiring every year. In the current financial year (ending March 2012), it plans to recruit 4,000 employees. "That helps with succession planning," says Mallya.

At 48 to 49 years on average, his bank's employees are four years younger than the typical public sector bank employee. The resulting mix of experience, prudence, drive and capability gives Bank of Baroda the edge on productivity. The bank's 1,500 senior executives will attend a leadership development programme during this financial year. The new Baroda-Manipal School of Banking will churn out 180 to 200 employees for the bank every quarter. It currently has 700 candidates enrolled in a one-year course, and a fresh one will start every quarter.

Even though Bank of Baroda has not topped on any parameter, it has breasted the tape because of all-round consistent performance. The competition next year could be stiffer, with newcomers giving older competitors a run for their money.