The market seems to be breathing a sigh of relief at public sector banks’ better-than-expected performance in the June quarter compared to the March quarter. The market gave a thumbs-up to Bank of Baroda’s better-than-expected earnings for the June quarter. While the bank reported a 22 per cent decline in June quarter profit when compared to the corresponding quarter last year, the sharp 75 per cent sequential improvement in profit has driven the stock price up. This substantial increase in earnings has primarily been led by the sharp fall in provisioning for bad loans.
Earlier this week, PNB also found favour with investors due to a marginal improvement in asset quality from the previous quarter.
For Bank of Baroda, gross non-performing assets as a proportion of loans went up from 3.72 per cent in the March quarter to 4.13 per cent in the June quarter.
But after adding about Rs 4,000 crore to restructured loans in the March quarter, the bank only added Rs 147 crore in the June quarter, as the window for restructuring closed from April onwards. The fall in overall stressed assets has led to lower provisioning and lifted earnings. But the bank has missed on several other counts.
For one, the bank’s net interest income growth continues to remain muted at 3.9 per cent during the June quarter. This is because the bank’s loan growth has slipped to 6.3 per cent in the June quarter from 7 per cent in the previous quarter. Two, the bank’s fee-based income also remains weak, with a modest 7 per cent growth in the June quarter. Three, return on asset has fallen to 0.6 per cent in the June quarter from 0.8 per cent last year. The return on equity has fallen sharply to 11 per cent from 15 per cent levels last year.
Going ahead, the pace of slippage into bad loans will need watching, and will hold the key to the stock performance.