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Business News/ Market / Mark-to-market/  The worst may not be over for Bank of Baroda
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The worst may not be over for Bank of Baroda

The bank has a substantial exposure to metals, and iron and steel sector, which is hit by commodity down cycle and slowdown in China

Stressed assets, which include bad loans plus outstanding restructured assets, rose to over 10.5% from around 9.9% in the three months ended 30 June. Photo: Pradeep Gaur/MintPremium
Stressed assets, which include bad loans plus outstanding restructured assets, rose to over 10.5% from around 9.9% in the three months ended 30 June. Photo: Pradeep Gaur/Mint

Bank of Baroda’s shares have been going up after an initial plunge on Friday, after the announcement of its results for the September quarter.

The new management, during the analysts meet, said it is looking at improving return on equity (ROE) to 18-20% in the next two-three years from around 6.2% so far in FY16.

ROE is a measure of how efficiently the company, or bank, is managing shareholders’ equity.

Given the smart recovery in the share price, investors may be taking a leap of faith in the new management. P.S. Jayakumar from Citigroup took over as the managing director and chief executive officer in October. Jayakumar highlighted key strategic initiatives such as management of bad loans, re-balancing of loan portfolio and focus on efficiency during the analysts meet on Friday.

It is entirely possible that the new management may be capable of turning around the bank, but there might be near-term challenges. Firstly, there will be more pain in terms of asset quality in the next couple of quarters because the management will be aggressive in recognizing the stress on the books. Slippages, or loans turning sour, jumped more than three times to 6,816 crore in the September quarter from 1,685 crore in the preceding three months. Most of the slippages came from iron and steel, infrastructure, and mining sectors during the September quarter.

The bank has a substantial exposure to metals, and iron and steel sector, which is hit by commodity down cycle and slowdown in China. Stressed assets, which include bad loans plus outstanding restructured assets, rose to over 10.5% from around 9.9% in the three months ended 30 June.

Secondly, loan growth may remain subdued for the next couple of quarters. Advances growth remained tepid at around 7.6% in the July-September quarter, slower than its average growth of around 10% in the past four quarters.

Even deposit growth remained sluggish at around 8% compared with the average of 11% in the past year. While Bank of Baroda is focusing on digital strategies, competition from payments banks and small banks may weigh on the deposit growth.

Emkay Global Financial Services Ltd in a note dated 12 October cut earnings estimates for the bank by 19% and 11% for FY16 and FY17, respectively, because of higher estimates of troubled loans and slower credit growth.

While Bank of Baroda’s core capital adequacy ratio is better than peers at 9.92%, it is just sufficient to meet the near-term business growth, according to Emkay Research.

Overall net profit slumped 89% to 125 crore in the quarter ended September from a year ago, the worst in around five years, as provisioning more than doubled. The bank also had to provide for alleged money laundering fraud worth 6,000 crore at a New Delhi branch.

Slower loan growth and higher bad loans weighed on net interest margin, which narrowed to a five-year low of 2.1%.

Bank of Baroda shares have fallen nearly 25% since mid-August and are trading at around 0.9 times price-to-book for FY16. Unless asset quality improves, the stock may continue to remain under pressure.

The writer does not own shares in the above-mentioned companies.

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Published: 10 Nov 2015, 07:35 AM IST
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