Bank of Baroda (BoB), which enjoys a healthy net interest margin (NIM), could see pressure building up on its profitability, due to higher credit costs and lack of mitigating fee-based income, according to rating agency India Ratings.
BoB’s NIM (3.1 per cent for the first half of FY13 and 3.07 per cent for FY12) and low cost-to-income ratio (36.5 per cent in H1 FY13 and 37.5 per cent in FY12) have ensured reasonable internal accruals and profits. This could change.
The bank’s profitability is contracting slowly, due to higher credit costs and lack of mitigating robust fee income (fee income to operating income at nine per cent).
According to India Ratings, the pressure on liquidity due to longer tenure loans, like infrastructure loans, could also lead to higher refinancing costs. This might dent the bank’s interest margins.
Referring to the dip in asset quality, it said the gross non-performing assets (NPAs) ratio rose sharply to 1.98 per cent at the end of September 2012 from 1.53 per cent in 2011-12. The rise was due to general macroeconomic deterioration across sectors.
Much of the slippages have been on account of cyclical deterioration across sectors and industries, such as agriculture, small industry, automobile and mining, among others. The trend might persist throughout FY13, the agency added.
BoB’s gross NPA ratio is expected to remain under three per cent over the near to medium term, better than the systemic average and other peer government banks.
Its Tier-I capital adequacy was 9.57 per cent in September. This does not factor in the profits generated during April-September 2012. The capital adequacy level is adequate to sustain its loan growth until FY15, as the public sector lender plans to grow in line with the system average of 18-20 per cent.
The government, which holds about 54.31 per cent in the bank, is likely to inject more capital over the medium term, India Ratings added.
