Bank of Baroda shines on core op­er­a­tions and as­set qual­ity

Mint ST - - MARK TO MARKET - Aparna Iyer

The sec­ond quar­ter re­sults of most banks showed an im­prove­ment in bad loan ra­tios and Bank of Baroda (BOB) was no dif­fer­ent.

Gross bad loans as a per­cent­age of the loan book slipped to 11.16% for the Septem­ber quar­ter from 11.4% in the June quar­ter and 11.35% a year ago. The bad loan ra­tio on a net ba­sis fell to 5.05% from 5.46% a year ago, in­di­cat­ing that BOB hasn’t cut cor­ners in pro­vi­sion­ing. In­deed, pro­vi­sions rose 13% from a year ago and its pro­vi­sion cov­er­age ra­tio im­proved to 57.73%.

The lender has pro­vided Rs162.94 crore to­wards the stressed ac­counts re­ferred to un­der the In­sol­vency and Bank­ruptcy Code (IBC). It still needs to make a pro­vi­sion of Rs325.69 crore to­wards these, which it plans to do in the next two quar­ters.

Keep­ing with this as­set qual­ity im­prove­ment, BOB re­ported a drop in fresh slip­pages to Rs2,586 crore, half of what it re­ported in the June quar­ter. Its up­grades also im­proved slightly to Rs640 crore from Rs589 crore in the pre­vi­ous quar­ter.

But this is a trend ob­served across the sec­tor, with most banks re­port­ing im­proved bad loan ra­tios and re­duc­tion in slip­pages. Much of this was ex­pected by in­vestors too.

So where does BOB stand out, if it does?

Un­like the coun­try’s largest lender State Bank of In­dia (SBI), BOB re­ported a healthy dou­ble-digit growth in loans. While SBI’S loan book barely grew, BOB re­ported a healthy 11% growth in do­mes­tic ad­vances. Even peers such as Pun­jab Na­tional Bank fell short here. Con­se­quently, net in­ter­est in­come growth was healthy and op­er­at­ing profit growth of 13% stemmed from both core and fee in­come.

Fur­ther, the growth comes from lend­ing to com­pa­nies that have rat­ings above AA, which au­gurs well for fu­ture as­set qual­ity. This shows that BOB has not sim­ply lucked out in growth but has also worked to­wards grow­ing its core op­er­a­tions. Given these pos­i­tives, the 36% drop in net profit could be eas­ily for­given by in­vestors.

How­ever, a nig­gling worry is from large write-offs. Bob’s write­offs for the quar­ter were eight times those of the same pe­riod last year at Rs1,728 crore. Un­less this is an aber­ra­tion, the lender’s as­set qual­ity out­look gets clouded. Write-offs gain sig­nif­i­cance es­pe­cially since the bank has a large ex­po­sure to ac­counts flagged by the reg­u­la­tor to be re­solved through IBC or through other routes since large hair­cuts are be­ing an­tic­i­pated from these loans.

For now, in­vestors can hope BOB con­tin­ues to re­peat its per­for­mance, mend­ing and lend­ing in the com­ing quar­ters as well.

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