Bank of Baroda's bad-loan ratio drops, boosting shares

By Devidutta Tripathy

MUMBAI (Reuters) - Bank of Baroda reported an improvement in asset quality, cheering investors, even as its quarterly profit nearly halved as the nation's second-biggest state-owned lender sharply increased provisions for bad and restructured loans.

Shares in the Mumbai-based bank rose as much as 17.8 percent and were headed for their biggest daily gain since May 2004.

Two straight years of weaker economic growth, stretched corporate balance sheets and stalled projects have led to Indian banks' bad loan ratio doubling in the past three years. State banks have amassed bad loans faster than private sector lenders.

The Reserve Bank of India also changed rules making loan restructuring costlier from April 1, leading to banks rushing to recast loans in the fourth quarter.

"We have taken advantage in this particular quarter that whatever advances could be restructured we should restructure and we have made a drive towards this," Bank of Baroda Chief Executive Officer Ranjan Dhawan told a news conference.

The lender restructured about 40 billion rupees ($626 million) worth of loans during its fiscal fourth quarter to March 31, more than triple it did in the year-ago quarter. Provisions, including for bad loans, rose 58 percent in the March quarter from a year earlier, leading to standalone net profit falling about 48 percent to 5.98 billion rupees.

Analysts, on average, had expected a net profit of 9.58 billion rupees, according to data compiled by Thomson Reuters.

The bank's gross bad loans as a percentage of total loans, however, was lower at 3.72 percent, compared with 3.85 percent in the previous quarter.

Dhawan said the improvement in asset quality for his bank was better than the management's expectations, but warned the banking sector was unlikely to see any substantial improvement in the bad loan situation in the next six months as key sectors such as steel and infrastructure remained troubled.

Increasing bad loan provisions put pressure on the state lenders, which are relatively less capitalised compared with their private sector rivals, to look for new capital. Dhawan said Bank of Baroda's capital adequacy ratio, at 12.6 percent, was "very comfortable".

The state banks have traditionally been funded by the government, but policymakers have in recent months said that they will be selective in infusing money into banks. With the Basel III norms kicking in, Indian state banks need almost $38 billion in new capital through March 2019.

($1 = 63.9000 rupees)

(Editing by Muralikumar Anantharaman)