Longer road to recovery for Bank of Baroda

While asset quality worsened, quarterly profits were boosted by other income

Bank of Baroda (BoB) put up a dismal show in the June quarter (Q1) as well, with rising bad loans taking a toll on overall results. The fact the bank reported an increase in bad loans, despite management’s assurance last quarter that the worst is behind, was a disappointment.

Gross non-performing assets (NPA) rose six per cent sequentially to Rs 43,000 crore; net NPA ratio increased 67 basis points (bps) to 5.73 per cent, partly due to the shrinking of the loan book. Though the management is hopeful of asset quality situation improving from the fourth quarter, analysts are not convinced.

Suresh Ganapathy, analyst at Macquarie Capital, says, “For several quarters now, management has been saying the asset quality issue is bottoming out but stress continues to be very high and gross NPA numbers are still increasing. We only hope H2 (FY17) will be better.”

Ganapathy has a ‘sell’ rating. Operationally, too, the June quarter was the eighth one in a row when BoB’s earnings fell on a year-on-year (y-o-y) basis. Strong surge in provisions for bad loans, higher tax rate and fall in net interest income impacted earnings. Thus, net profit, at Rs 424 crore, was much lower than the Bloomberg consensus estimate of Rs 528 crore. Though the profit came after consecutive quarters of losses of over Rs 3,200 crore each, it was down 60 per cent y-o-y.

The turnaround is positive but the Street is not sure if it is sustainable. For one, the profit is fuelled largely by an uptick in treasury gains and monetisation (sale) of the excess SLR (bonds) holding, estimate analysts at Reliance Securities. This, helped non-interest income grow 49 per cent y-o-y to Rs 1,444 crore.

Advances and deposits fell in Q1, as BoB is in the consolidation phase and plans to discontinue unprofitable businesses. At a time of elevated asset quality stress, management’s decision of going slow on growth might help in conserving capital, which can be deployed to meet its increasing provisioning requirements. However, these efforts will bear fruit only gradually, while in the interim, the bank might lose out to peers in terms of market share and business. Till the fruits accrue, the bank’s quarterly performance is likely to remain under pressure. Among some positives, BoB was able to control operating expenses, which aided profits.

The Street’s concerns reflected in the BoB scrip, which fell 9.5 per cent on Thursday despite a flat Sensex. Stock valuations are undemanding.