We have seen this earlier in the case of State Bank of India and Allahabad Bank. When new bank chieftains take charge in troubled times, the first thing they do is embark on a clean-up drive. S.S. Mundra, the new chairman and managing director of Bank of Baroda (BoB), too, is wielding the broom a couple of weeks after he took over.
Gross non-performing assets (NPAs) of the lender rose by Rs.1,442 crore during the three months ended December, the sharpest rise in at least eight quarters. As a proportion of the loan book, gross NPAs are now 2.41%, against 1.98% at the end of September.
Now, that might not have been too bad, but for a couple of things. One, for a long time now, BoB has had a relatively low level of NPAs, almost as if it was operating in a different environment than other public sector banks. This bank, too, has advanced credit to shaky sectors such as infrastructure and textiles to an extent of one-fifth of its loan book. Retail loans, which include loans to farmers, and small and medium enterprises, make up another one-sixth. However, as JPMorgan India Pvt. Ltd points out in a recent note, “BoB has not shown the same level of pain in agri and industry as some other PSU banks (agri non-performing loans are in high single digits for some). We think this gap will close as the long-term effects of the downturn start to hit.”
Second, BoB continues to recast a lot of loans. Cumulative restructured assets stood at Rs.22,993 crore at the end of the December quarter; roughly about 7.6% of its loan book. In the three months ended 31 December, the bank added Rs.1,587 crore in restructured loans, compared with Rs.933 crore in the September quarter and Rs.771 crore in March.
On top of this, BoB’s business growth has been underwhelming. Loans grew 14.8% over a year ago, a tad slower than the industry growth rate. As a result, a raft of operating metrics was at multi-quarter lows. Net interest income grew only 7% from a year ago, non-interest income declined by one-fourth and operating profit declined for the first time in three years.
Margin pressures also contributed to this downfall. Net interest margin for the December quarter narrowed to 2.65% compared with 2.71% in September and 2.99% in the year-ago quarter. That, in turn, is a fallout of the slowing growth in low-cost current account and savings account deposits. This segment now accounts for only 32% of aggregate deposits compared with nearly 40% four years ago.
The poor operating metrics combined with increased provisions meant that net profit fell 21.5% from a year ago. At a press conference to announce the earnings, Mundra said that “apart from a professional angle, I have no other agenda (referring to the increase in NPAs)”. But in the same breath he guided for a “challenging” couple of quarters. The 7.5% decline in the stock price on Monday points to more pain.