Bank of Baroda is the first public sector bank to swallow the bitter pill and make all the provisions for bad loans dictated by the Reserve Bank of India (RBI) asset quality review at one shot. True, that led to the bank reporting its highest ever quarterly loss in the December quarter. But it wipes the slate clean, removes the overhang of uncertainty from the stock and opens up new possibilities for the future. P.S. Jayakumar, who took over as managing director last October, is to be commended for a refreshingly new approach. “It is sensible to bite the bullet, show the losses and move on," said Jayakumar.

The upshot is that while the bank posted a loss of 3,342 crore in October-December as provisions for bad loans quadrupled, the Bank of Baroda management is the first among all the public sector banks to say that the worst may be over.

“Even in a moderately deteriorating environment, losses should be contained," said Jayakumar during the conference with analysts after the results announcement.

That said, there are plenty of reasons for concern. The gross bad loan ratio to total gross loans is now at 9.7%, and gross non-performing assets (NPAs) are at 38,934 crore. Slippages more than doubled to 15,603 crore from the September quarter as loans from the iron and steel and power sectors turned sour. What was surprising is that only half of the fresh additions to bad loans were because of RBI’s asset quality review. Interest income reversal on account of high slippages hurt net interest margins, which declined to 1.7%, down 36 basis points, compared with a quarter ago. A basis point is 0.01 percentage point.

Overall stressed assets, which includes bad loans plus restructured assets, climbed to 14.5%, compared with 11% in September end. The bank has classified loans outstanding worth 5,427 crore under the 5/25 scheme and around 2,400 crore under strategic debt restructuring (SDR) so far in FY16.

With such a huge loss reported in the December quarter, the return on equity for Bank of Baroda turned negative, down 8.11% for the first nine months of FY16. The stressed assets swelled to 1.4 times the bank’s net worth, as of December end. But the management is confident that it is adequately buffered, with the capital adequacy ratio at 12.18%. In fact, it has asked the government to exclude them from the list of banks that need capital.

Jayakumar expects the return on equity to move back to 8-12% in the coming years as they won’t have to keep aside such high provisions for troubled loans. The management highlighted that its progress was on track for strategic initiatives such as managing bad loans, re-balancing the loan portfolio and focusing on efficiency.

Bank of Baroda shares have halved in the past year and are trading at 0.6 times one-year forward price-to-book. To be sure, investors will have to wait for clear signs of strengthening of the bank’s balance sheet. But it is to be hoped that, as they say, well begun is half done.

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