Bank of Baroda stands apart among PSU banks

Loan restructuring pipelines and commentary on asset quality continues to be bearish for most banks

The slowing economy and high interest rates have hit public sector banks (PSBs) hard; their asset quality has taken a beating in the past two-three years. For most banks, the loan restructuring pipeline and commentary on asset quality continues to be bearish.

As a result, the stocks of most PSBs have been hammered. The CNX PSU Bank index is down 45 per cent against its intra-day high of 3,860 on January 11, (down 55 per cent since April 2011). However, a few of these banks are recording relatively better asset quality. Their managements remain confident on both growth and credit quality. Of the prominent PSBs, Bank of Baroda (BoB) stands out on these parameters. Analysts rate these banks high among public sector lenders and upsides are reasonable, given the target price.

  BoB has managed to keep its asset quality tight. Though the bank’s non-performing assets (NPAs) saw a substantial rise in the December quarter, the NPA ratio is still low among public sector banks. Its delinquency ratio has fallen from 2.7 per cent in the March 2013 quarter to 1.8 per cent in the December quarter. Among the key reasons for the relatively better asset quality is the fact that the bank’s loan book is spread across sectors. Compared to its peers, BoB has been relatively less aggressive in lending to the power sector. Also, troubled sectors such as metals and infrastructure form a smaller part of BoB’s portfolio, compared to its peers.

For instance, as on March 31, , only two sectors accounted for more than five per cent of BoB’s domestic loan book (iron and steel at 5.14 per cent and Power sector at 7.07 per cent). Rest all sectors formed less than five per cent of its book. In comparison, SBI had 7.04 per cent exposure to Iron and Steel, about 13 per cent to Infrastructure with power forming a significant chunk of its infrastructure book in March 2013.

In case of Bank of India, too, Infrastructure exposure stood at 35.1 per cent in March 2013 and 35.8 per cent in the December 2013 quarter. Power sector accounted for 10.9 per cent at end-March 2013 and 10.1 per cent in December 2013 of the total infrastructure book. Metals exposure stood at 14.4 per cent in March 2013 and 13.1 per cent in December 2013 quarters.

The strong credit quality of BoB’s international loan book (27-30 per cent of total loans) has also supported its overall asset quality. The bank’s focus on improving recoveries and the low rate of slippages is another positive. Angel Broking analysts led by Vaibhav Agarwal, vice-president (research-banking), say recoveries and upgrades stood at Rs 495 crore in the December quarter, against an average of Rs 300 crore through the last four quarters.

Analysts expect BoB’s slippage ratio (which indicates the proportion of assets, standard or restructured, turning into NPAs) to fall from 2.4 per cent in FY13 to 2.2 per cent this financial year and 1.9 per cent in FY15. The bank’s gross NPA ratio is expected to stabilise at 3.3-3.5 per cent in FY14 and FY15, analysts say. The management, too, expects asset quality to stabilise.

“For FY14, we expect BoB’s loan traction to be in line with the sector’s. On the NPA front, the bank’s performance could be relatively better than its peers. In the past two quarters, its performance has been healthy, in terms of asset quality, business traction and MTM (mark-to-market) management. Also, at about nine per cent, Tier-I CAR (capital adequacy ratio) is better than its peers,” says Kajal Gandhi of ICICI Securities. Gandhi has a ‘buy’ call on BoB, with a target price of Rs 610.

Despite the challenging environment, analysts (as per Bloomberg consensus estimates) expect BoB's earnings per share to rise by 14.8 per cent to a little over Rs 120 in FY15, and by another 15.2 per cent to Rs 138.7 in FY16.

The bank's gross NPA ratio has reduced 40 basis points from two% in FY10 to 1.6% in FY13. December 2013 quarter was the ninth quarter in a row where the bank's gross NPA was below 2% level. This is commendable considering that most PSU banks have witnessed deterioration in asset quality over the past 2-3 years, as well as in recent quarters.

Going forward, the restructuring pipeline remains minimal and the bank management is confident of maintaining its asset quality. Most analysts are also factoring in similar gross NPA ratios for FY14 and FY15 (with minor increase of about 10 basis points in FY15).

Robust economic activity in the J&Kaugurs well as the bank lends primarily to corporates/contractors engaged in development work of the state. In the retail segment, large part of loans are for housing and state government employees form a large chunk of the bank's borrowers. The loan book outside J&Kstate is corporate heavy but the bank has ensured to lend only to corporates with high credit rating.

They have maintained provision coverage ratio at a healthy 90% level.

"Higher loan growth outlook with CD (credit/deposit) ratio improvement and shift in loan mix towards higher yielding advances could provide momentum to NII growth for the bank relative to other mid-sized banks. The bank also has a higher CASA (current and savings account) ratio, strong capital adequacy and robust provision coverage, much higher than most other mid-sized banks", says Vaibhav Agarwal, VP- Research – Banking, Angel Broking.

While it has a strong position in the J&K, it is planning to ramp up presence outside the state, which will fuel the bank's growth going forward.