Bank of Baroda: Slipping on bad loans

In the last year, many public sector bank stocks have rallied on hopes of a revival in the economy. But rather than improvement, an extended slowdown has only worsened asset quality and dragged credit growth to five-year low levels. As of December 2014, the loan growth for the industry has slipped to about 10.5 per cent, much lower than the 14.2 per cent recorded the year before.

While there are signs of recovery in the economy, an upturn in investment cycle still seems some quarters away. In the meanwhile, muted credit growth and deteriorating asset quality will further hurt, in particular, the profitability of state-owned banks that continue to see their stockpile of bad loans increase.

Bank of Baroda, which was able to contain fresh additions to bad and restructured loans till about two quarters back, has been witnessing incremental stress since then. In the latest December quarter, fresh slippages to bad loans went up sharply to ₹3,042 crore from ₹1,758 crore in the September quarter.

Incremental restructuring which has been rising from the September quarter shot up to ₹1,598 crore in the December quarter. With this, the bank’s stressed assets are close to 10 per cent of loans.

Of this, the domestic restructured book is a steep 8 per cent of loans. Given the slow pace of economic recovery and Bank of Baroda’s large exposure to the large and SME corporate segment, asset quality pressures are likely to persist for a couple of more quarters.

Increase in slippages from its large restructured book is also a concern. The bank’s historical slippage rate from restructured loans, which was 12 per cent, has gone up sharply to 20 per cent.

The possible increase in provisioning due to higher bad loans and slow off-take of credit will continue to impact the earnings of Bank of Baroda.

In the last year, the stock has rallied 71 per cent with its valuation rising from about 0.7 times one year forward book value to about 1 time currently. With the stock’s valuation close to its historical five-year average and marked risks to earnings, investors can book profits now and buy the stock later when there is an actual turnaround in economic activity.

In the latest December quarter, Bank of Baroda’s profit fell a steep 68 per cent due to a couple of reasons.

The first was a one-off tax charge levied on the bank by the Dubai Income Tax authorities — this amounted to about ₹413 crore, including penalty. Even excluding the one-time tax charge, the bank’s profit declined 29 per cent over the same period last year. Increase in bad loans led to a 40 per cent increase in provisioning for them. Muted credit growth added to the woes. As of December 2014, the bank’s total loan book (overseas and domestic) grew 11.7 per cent.

But domestic advances grew a tepid 9.8 per cent, a tad lower than the sector’s credit growth. Aside from the lacklustre pace of growth, changes in loan mix also impacted margins.

Predominantly a corporate lender, Bank of Baroda has been focusing on the retail and SME segment to offset the slack in the corporate segment. This has helped the bank scale up loan growth to an extent, but the increase has not been substantial.

While retail loans grew 14 per cent as of December 2014, it was mainly driven by the highly competitive home loan segment. The bank remains wary of risk in the SME segment and continues to lend mostly to high-rated corporates where the yields are not that attractive.

All this has resulted in lower yields on loans, putting pressure on the bank’s net interest margin.

With interest rates falling, while the bank will gain on lower cost of deposits, pressure in the industry to bring down lending rates will continue to weigh on profitability.

However, Bank of Baroda is well capitalised with Tier I ratio at 9 per cent. The Government, this year, has decided to infuse ₹1,260 crore by way of capital into the bank.