Bank of Baroda: Asset quality woes may not be over yet

Stress likely to continue for some more quarters

The Bank of Baroda (BoB) stock surged 17 per cent on Monday to Rs 169.65, as the bank surprised the Street with better-than-expected asset quality in the March quarter. Both gross non-performing assets (NPA) and net NPA ratios improved sequentially. While gross NPA fell 13 basis points sequentially to 3.72 per cent, net NPA contracted 22 basis points sequentially to 1.89 per cent. Fresh slippages, which stood at Rs 1,359 crore were the lowest in the four quarters of FY15. Higher provisioning (up 44 per cent sequentially and 57.6 per cent year-on-year) to Rs 1,818 crore aided asset quality ratios to some extent. The jump in provisions was largely due to a 134 per cent year-on-year surge in provisioning towards NPAs and bad debts written off, to Rs 1,491 crore. While the Street cheered the bank’s improving asset quality, sustained improvement in this metric is some time away. Part of the share price gains could also be attributed to the near 15 per cent fall between May 5 and 8.

The BoB management continues to witness stress in the environment and indicated that improvement in asset quality in the quarter was better than expectations. The management stated more restructured assets were struggling to become solvent and asset quality pressure was unlikely to ease over the next six months.

Slowing loan growth, weak net interest income (NII), higher provisions and tax rate impacted BoB's net profit in the March quarter, which fell 48.3 per cent year-on-year to Rs 598 crore. This was 37 per cent below Bloomberg consensus estimate of Rs 955 crore. Although BoB’s domestic net interest margin were down slightly due to falling domestic yields, NII grew a mere 1.5 per cent year-on-year to Rs 3,172 crore. This was its lowest growth since the September 2013 quarter and was impacted by weak loan growth of 7.8 per cent, which again is the lowest in the past 8-10 quarters. Analysts including Vaibhav Agrawal of Angel Broking, however, believe banks having seasoned loan book are more likely to witness early improvement in asset quality trends. He believes BoB is well placed in this light and the asset quality improvement outweighs the miss on net profit in the quarter.

Other income fell marginally to Rs 1,295 crore in the quarter, owing to weak recoveries from prudentially written-off accounts. The recovery was down 83.44 per cent at Rs 60 crore and negated a four-fold year-on-year rise in trading gains at Rs 360 crore. The bank's tax rate jumped from 18 per cent in year-ago quarter to 31.7 per cent on account of discontinuation of reduction of deferred tax allowed earlier. The tax rate is likely to remain elevated.