Bank of Baroda begins post-merger innings on a strong wicket; stock rises

Despite a few misses, the Street seems to be pleased with Bank of Baroda’s (BoB’s) consolidated numbers. The BoB stock has risen 7.5 per cent in a week. While the merger with Dena Bank and Vijaya Bank was concluded mostly in line with the management’s guidance, it does throw up fresh challenges for the bank.

First, reserves of the two banks were marked down by 86 per cent and 24 per cent, respectively, to synchronise the asset quality and accounting practices (particularly retirement-related benefits), with BoB.

This has eaten into the capital adequacy of the consolidated bank, which fell to 9.7 per cent (June quarter) from 11.6 per cent (standalone in Q4FY19). While the write-offs were within the guidance provided by the bank and hence remove investor doubts, analysts at Motilal Oswal Financial Services nevertheless indicate that BoB may be in need of capital in the near term, and could be a beneficiary of a possible recapitalisation exercise undertaken by the government in FY20.

That said, the process has standardised the merged entities’ provision coverage ratio to 66 per cent —closer to BoB’s standalone number — indicating the bank has taken the required hit on its balance sheet.

However, the combined entity’s exposure to non-banking financial companies (NBFC) is now at 16 per cent of the total loan book, with nearly a third in housing finance companies (HFCs), including Dewan Housing.

While BoB is reducing its exposure to the sector by buying out retail assets of HFCs, analysts at Nomura say more clarity on quality of these loans will help crystalise the provision requirement on this portfolio.

Another area in need of urgent attention is the share of the low-cost current account savings account (CASA) deposits. The CASA ratio has dipped from 40 per cent (standalone) to 32 per cent after consolidation.

To keep costs under control, BoB needs to bring the same back to its previous levels, given how other sources of long-term capital have turned expensive and tough to mobilise.

Eventually, these are niggling aspects that will play out for the most of FY20. The major monitorable is integration of information technology, a process that is still work-in-progress.

Yet, at 0.7 times its FY21 book value, BoB appears attractive, given its ability to walk the talk on most merger-related aspects.