Bank of Baroda: With loan recast hazy, strong re-rating few quarters away

While BoB has displaced PNB in terms of loan book size, sustaining Q2 momentum is critical

If State Bank of India’s September quarter (Q2) results stunned the Street, Bank of Baroda’s (BoB) performance was no less. With over five per cent loan growth and 15 per cent growth in retail credit — aiding 128 per cent year-on-year (YoY) increase in net profit — the good show helped the stock gain over 11 per cent after Q2 results.

Interestingly, with a loan book size of Rs 6.69 trillion as on September 30, BoB has displaced Punjab National Bank, or PNB (Rs 6.53 trillion), on this parameter. What’s noteworthy is that last year, when the mega consolidation of public sector banks (PSBs) happened, PNB retained its number two slot in terms of loan book, while BoB took the third position. While both banks owing to the merger and ageing provisions of legacy bad loans have written off a reasonable portion of their troubled assets, the change in the pecking order positions BoB favourably.

Apart from better loan growth, some of BoB’s Q2 performance highlights include net interest margin (NIM) reclaiming its three per cent mark, lower slippages and resultant easing of provisioning cost.

But, it will be critical to watch out for whether the picture changes in Q3 if the Supreme Court vacates the stay on recognition of non-performing assets (NPAs). The bank had indicated that Rs 15,000 crore of loans were provided such deferral benefits in Q2, against which it has made 12 per cent provisioning. These loans account for less than a per cent of total book. That said, higher-than-anticipated slippages may skew the picture, given that provisioning cover against the Covid-19 disruption is just 0.3 per cent of total book at Rs 1,748 crore.

In addition, analysts at JP Morgan say that at 5.46 per cent of loan book, the bank’s 30 days and 60 days’ overdue book is relatively high. Importantly, better recoveries offered some relief in the quarter and sustaining this will be key for re-rating, they add. “We think two large stressed accounts could potentially reach resolution within Q3,” they note, though they seemed satisfied with BoB’s Q2 show overall.

While BoB is the most preferred PSB stock after SBI, analysts aren’t in a hurry to upgrade recommendations. “Picture is improving but it’s still not time to buy,” say analysts at ICICI Securities. BoB stock has more than halved year-to-date and with loan recast remaining hazy, a significant re-rating may be some quarters away.