Bank of Baroda Q2 analysis: Decent show thanks to pick up in credit growth, fall in slippages

Addition to the bank’s watchlist of stressed accounts may need watching

Bank of Baroda, which has been weighed down by the Centre’s decision to amalgamate the bank with Dena Bank and Vijaya Bank, has seen some respite after its September quarter results. The stock rose nearly 4.5 per cent intra-day today after the bank announced its September quarter results late Tuesday evening.

The stock closed 0.73 per cent higher at ₹110.80 on the BSE on Wednesday.

A good pick up in credit growth, healthy growth in core net interest income and fall in slippages have led to the bank reporting a 20 per cent y-o-y growth in net profit. After reporting sharp slippages in the March quarter on account of the RBI’s framework for stressed assets, BoB has seen slippages moderate over the last two quarters. While slippages and provisioning requirement moderating is a positive alongside improvement in core performance, how far the trend finds favour with investors needs to be seen, particularly in light of the lender’s amalgamation with a weaker and low- capitalised PSB (Dena Bank).

Notably, despite a chunk of the September quarter slippages coming out of the BoB’s watchlist (stressed assets pool), the outstanding accounts under watchlist as of September is more or less similar to the levels seen in the June quarter. This implies that the bank has seen additions to its watchlist. Hence, it is unclear whether the NPA recognition cycle is complete.

Out of the woods?

From 12.46 per cent in the June quarter, BOB’s gross non-performing assets ratio has fallen to 11.8 per cent in the latest quarter. The bank had reported sharp slippages of over ₹11,000 crore in the March quarter. This had moderated to ₹2,800 crore in the June quarter and then to ₹2,200 crore in the September quarter.

It is important to note that the ₹700-odd crore fall in gross NPAs in absolute terms in the latest September quarter has been driven by the fall in NPAs in international loan book; on the domestic front, while corporate NPAs moderated, MSME and agri bad loans have inched up.

Also, while 84 per cent of the September quarter slippages have been from the June quarter watchlist (₹8,600 crore), the bank’s watchlist remains sticky at ₹8,500 crore as of September 2018. Accounts outstanding under watchlist for power, iron and steel, and textiles appear to have inched up in the latest quarter.

Better core performance

While asset quality needs a watch, Bank of Baroda’s core performance has been showing signs of a pick up. The bank’s net interest income grew by 20.7 per cent YoY in the September quarter, with domestic advances growing 20 per cent on the back of strong traction in retail loans. However, the sustainability of this trend will be critical.

Importantly, the uncertainty over the swap ratio (on amalgamation) remains a key overhang for investors in the stock. Also, concerns over the amalgamation putting BOB’s recovery efforts on the backburner, continue to persist.

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