BoB fails to keep its promises

Net interest income grew only five per cent year-on-year at Rs 3,330 cr, missing Bloomberg estimates of Rs 3,731 cr

After promising that much of the provisioning for bad loans was undertaken in the December 2015 quarter, what came from Bank of Baroda (BoB) in the March 2016 quarter result was a huge disappointment.

Net interest income (NII) grew only five per cent year-on-year at Rs 3,330 crore, missing Bloomberg estimates of Rs 3,731 crore. Other interest income stood at Rs 1,077 crore, a rise of 86 per cent as compared to the corresponding quarter last year. Of the total interest income, Rs 674 crore pertained to income-tax refunds which largely supported NII growth in the March quarter. NII is the difference between interest earned and expended. But, the shocker was Rs 3,230 crore of net loss versus Bloomberg estimate of Rs 129 crore of net profit.

Pain was visible in parameters such as net interest margin (NIM) and advances. NIM, a profitability parameter, for domestic business marginally fell to 2.7 per cent, from 2.8 per cent a year ago. But, the worrisome point is the slowdown in advances. Gross advances fell 1.5 per cent to about Rs 4 lakh. The decline was led by retail lending (accounting for about 18 per cent of total advances), which dipped by three per cent year-on-year. The decline in retail loans comes at a time when most private banks are focussed on and witnessing strong growth in the retail segment, which is currently being perceived to be more safe than corporate loans.

Also, while savings deposits grew 12 per cent year-on-year, current account deposits contracted 13 per cent in March 2016 quarter, raising red flags for investors.

There are concerns on the bad loans front also. Gross non-performing assets (NPAs) were Rs 40,521 crore, almost trebled year-on-year. It was also higher than Rs 38,394 crore posted in the December 2015 quarter.

Fresh slippage of Rs 4,373 crore for the quarter was significantly lower than December quarter slippage of Rs 15,603. But, gross NPA ratio at 9.99 per cent rose from December 2015 quarter level of 9.68 per cent. Net NPA ratio declined to 5.06 per cent against 5.67 per cent in the December quarter.

Siddhart Purohit of Angel Broking, who is negative on state-owned banks, said provision coverage ratio at 60.1 per cent in the quarter (versus 52 per cent in the December quarter) is the only positive for BoB. What's worse is that Rs 26,000 crore of loans put under watch list, and BoB forecasting gross NPA at Rs 45,000-Rs 50,000 crore in FY17, indicating that pain is far from over. After the results, four of the seven analysts have a sell or hold rating on the stock.

The average target price of these seven analysts is Rs 142, indicating a downside of about seven per cent from the current level.