Merger a weak link for BOB on asset quality concerns

Higher slippages, flat loan growth add to worries

Mergers take time for results to get reflected in the books. In the case of banks, the timeline could be stretched further given the unpredictable nature of asset quality. This held true for Bank of Baroda’s (Bob’s) September quarter (Q2) results too.

With the management being focused towards integration of the merged entity, BOB posted the weakest show by any bank in Q2. Loans grew a mere 2 per cent, as the bank worked towards reducing its corporate loan book.

The unnerving factor, though, was that of asset quality. The metric showed little signs of easing in the case of BOB, a deviation from the trend witnessed across the sector.

With the gross non-performing asset (NPA) ratio firm at 10.3 per cent (near the June quarter’s level), and net NPA ratio at 3.9 per cent, analysts at Phillipcapital say the merger-related integration will take precedence over a turnaround, in the eyes of the management.

Further, slippages (loans turning bad) remaining elevated at ~7,300 crore, or 4.6 per cent of the total loan book in Q2, shows asset quality is unlikely to improve in the near term.

BOB has earmarked ~14,500 crore of loans as potentially troublesome accounts (watch-list), though the overall list of stressed assets reduced marginally to ~84,470 crore in Q2.

With the bank not providing for two key accounts that could turn troublesome in the ongoing quarter (DHFL and Suzlon), Nomura says credit co st for F Y20 may remain elevated at 230 basis points.

However, the silver lining was the i mprovement i n domestic net interest margin to 2.92 per cent from 2.8 per cent a year ago. This was led by a rise in the share of low- cost current accountsaving account deposits to 33.6 per cent, from 28.9 per cent last year.

In addition, retail loans — led by home and auto loans — grew 16 per cent year- on-year, keeping BOB on track in shrinking its corporate exposure.

With asset quality taking precedence, the BOB stock is slowly losing appeal. From 25 ‘buy’ recommendations a year ago, the number has dipped to 22 (despite the benign 1x FY21 estimated book value). The stock has shed 3.3 per cent after the Q2 results.