Can BoB spearhead a recovery among PSBs?

Easing accretion of bad loans, stabilising NPA ratios are positives

After several quarters of dilly-dallying on whether the worst is behind Bank of Baroda (BoB), September quarter (Q2) results offer some respite. With gross non-performing assets (NPA) ratio settling at 11.16 per cent and more importantly, gross NPAs restricted at Rs 46,307 crore — almost at par with June quarter levels, it gives investors a ray of hope that BoB is nearing the end of bad loan recognition process. Another positive is the slippages (loans turning bad) ratio declining to 2.8 per cent in Q2 as against 4.7 per cent in June 2017 quarter. The slippages ratio at 3.6 per cent for first half of FY18 doesn’t compare too steep when seen against FY17’s 3.6 per cent, considering that June 2017 was a period of maximum recognition. Therefore, if fresh surprises don’t spring up, BoB should be at a better footing in two to three quarters. 

Encouragingly, operational performance of BoB appears stronger (see table) than peers. Helped by lower cost of funds and improved operations, domestic net interest margin (NIM) rose to 2.66 per cent in Q2, after three quarters of shaky performance. While this is still lower than a year-ago NIM of 2.85 per cent, the number being on an upward trajectory in Q2 is a sign of stability in operations. 

With these positives, investors shouldn’t be bogged much with the 36 per cent year-on-year decline in Q2 net profit to Rs 355 crore. Higher provisioning costs (Rs 2,687 crore); up 26 per cent year-on-year, played the spoilsport.

But, this also helped BoB increase its provision coverage ratio (PCR) from 62.95 per cent last year to 67.18 per cent in Q2; among the best within public sector banks.
 

Notably, much of the operational growth drew support from healthy loan growth of 13.8 per cent y-o-y, (up 34 per cent y-o-y). Likewise, the stickiness of low-cost CASA (current account — saving account) deposits ratio at 38.3 per cent suggests that there is room for sustaining  profitability.

While these factors add up well, it still doesn’t remove the risk of elevated provisioning costs. For instance, while BoB has adequately provided for 10 cases referred to Insolvency and Bankruptcy Code and has another Rs 330 crore to provide for such accounts, higher regulatory requirement could impact. Investors should also be wary of 57 per cent exposure to loan accounts with low rating. While BoB increased the proportion of exposure to better rated (A and above) enterprises from 29 per cent in FY16 to 43 per cent in Q2, a slip in repayment schedule by weaker accounts could defer a meaningful improvement in asset quality.