Bank of Baroda's (BoB) December 2012 quarter results were eclipsed by rising restructured loans and higher provisioning-leading to a sharp fall in net profits. Steep rise in provisions, which was up 23% year-on-year to Rs 1,029 crore, led to a 22% fall in the net profit for the quarter. The decline in quarterly profit is among the first in as many as 30 quarters.
What’s worse is that its non-performing assets (NPA) ratio also increased and going forward as well, the bank’s management expects asset quality pressures to continue. This saw the BoB stock tank about 8% intra-day on Monday, before closing down by 7.5% at Rs 802 as against a mere 0.15% fall in Sensex.
While most analysts are likely to trim their earnings estimates for FY13 and FY14 post the results, a few are optimistic on the bank pointing to better performance vis-à-vis peers. Vaibhav Agrawal, VP Research-Banking, Angel Broking, says, "Though Bank of Baroda's asset quality has deteriorated, current levels of NPAs are much lower than its peers in the PSU banking space. We believe results have been lower than expectations due to the management transition. We remain positive on the bank and expect 12-13% upside in the scrip from current levels."
However, the bank’s new chairman and MD, S S Mundra has categorically denied any connection between the higher bad loans and management transition. In this backdrop, the Street will be cautiously watching the bank’s future performance (especially NPAs), at least for a quarter or two, which could weigh on the stock’s performance. More so, valuations are up in the last few months at Price to estimated FY13 book value of 1.1, which is not cheap.
For the December 2012 quarter, the growth in BoB’s interest income was lower than the cost of funds, resulting in lower operating profits, compared to the year ago quarter. Its net interest margins (NIMs) in the domestic business, thus, contracted by 15 basis points sequentially (and 43 basis points year-on-year) to 3.08%. The sequential drop in NIMs is even after the bank saw the proportion of low-cost CASA deposits (of total) improve sequentially to 32.2% from 31.8% in the previous quarter. The bank attributes the higher cost of bulk deposits to the decline in margins, which it plans to reverse by increasing the share of CASA deposits.
Growth in net interest income was also lower than Street's expectations of 14%, and was a function of lower than expected loan growth of 14.8%. This was BoB's lowest loan growth in nearly 12 quarters, partly due to the benign economic environment. The case with deposit growth is not different. Deposits growth also came lower at 18.7% as against its 22-24% in the last 10 quarters.
Among the key things, the bank's restructured assets in the quarter stood at Rs 1,567 crore and management expects to add similar amount of loans to its restructured book for each of the next two quarters. The rising asset quality pressures led to strong uptick in both Gross as well as Net NPA ratios, which stood at 2.41% and 1.12%, respectively – the highest levels in the past two years. Agriculture and manufacturing sectors were the key contributors to asset quality pressures.
Although bond prices are higher, both year-on-year and sequentially, in the December 2012 quarter, BoB’s treasury gains were lower (thanks to a high base; in December 2011 quarter, the bank had book treasury gains of nearly Rs 400 crore) pulling its other income down by 26.9% over the previous year. Thus, the bank’s net profit fell by 21.6%, in sharp contrast to 1-2% increase as per Bloomberg consensus estimates.
Siddharth Teli, Financials analyst at Religare Capital Markets says, “The net profit came in below expectations with key disappointment being very high slippages and high restructured assets. However, lower tax rate of 16.5% acted as a cushion to the bottomline."
Going forward, the management expects to end FY13 with loan and deposit growth of 16% and 15%, respectively, while for FY14, it is hopeful of growing at higher than industry rate. However, the key to watch out for is its asset quality, which is likely to remain under pressure.
