For Bank of Baroda stock, is the rally sustainable?

Experts attribute the gain to the positive commentary provided by its management and the way the problem of stressed accounts were handled

Despite ending the quarter with a net loss of Rs 3,342 crore, the highest from any bank so far, the stock of Bank of Baroda (BoB) zoomed 22 per cent in trade on Monday.

Experts attribute the gain to the positive commentary provided by its management and the way the problem of stressed accounts was handled.

Provisioning for these accounts, up five-fold from Rs 1,262 crore in the same quarter of FY15, grew to Rs 6,164 crore. However, with the management affirming it had absorbed much of its bad loans' stress as mandated by the Reserve Bank of India and that not much pain was left for the March quarter, it boosted sentiment.

The question is whether the pain is over. “Even as most of the bad loans have been absorbed, the provision coverage ratio (PCR) declined significantly and that is not a great sign,” says Siddharth Purohit of Angel Broking. The PCR was 65 per cent in the June quarter, declined to 58 per cent in the September one and is now at 52.7 per cent, he points out. This, he says, indicates that even if the ratio improves, the bank will have to take on more provisioning, which will hurt profits. “Therefore, the pain might continue to exist and profit growth limited in FY17.”

The good part is that the management is undertaking various initiatives to improve the quality of its loan book, recovery of bad loans, improvement in profitability and, importantly, releasing of capital (locked in unproductive areas) for strengthening its balance sheet.

All these should lead to better growth in earnings and return rations, albeit over a longer time frame.

For now, 19 of 27 analysts polled by Bloomberg since the banks results last Friday have a 'buy' rating on the stock, three are neutral and only five have a 'sell' rating. Their average target price of Rs 147 doesn't reflect sizable gains in the near term but if the numbers improve as anticipated, expect higher gains.