Home >Markets >Mark To Market >Bank of Baroda heals from covid blow but yet to conquer stress

Bank of Baroda’s September quarter performance showed that the lender has recovered swiftly from the blow of the pandemic but the asset quality outlook is still unclear.

The public sector lender reported a net profit of 1,679 crore, beating Street estimates by a mile. The beat on profit was largely because of a sharp sequential increase of 28% in operating profit. Bank of Baroda’s core interest income grew by 7% year-on-year, and together with stable net interest margin boosted operating profit. Investors seem to have taken notice as the stock gained 1.8% after the release of the results.

A healthy 7% growth in the domestic loan book led mainly by the retail book was also another upbeat operating metric. The management expects retail loan growth to remain robust even in the coming quarters.

On firm footing
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On firm footing

This is surprising given that the outlook on consumption demand is not sanguine. Indians are going slow on purchases of homes, cars and even other discretionary items given the stress on jobs and incomes. But the management seems to be confident in its retail loan book.

“We believe that despite having a reasonably aggressive strategy in retail, we are well placed," said Sanjiv Chadha, managing director of the bank, in a media call. Chadha added that the bank only lends to borrowers with high credit scores.

To be sure, the lender indicated that demands for restructuring have been minimal so far, which indicates that stress isn’t as bad as was earlier anticipated. Indians don’t seem to need lenient terms on their loans. But note that borrowers have time until December to apply for restructuring. Ergo, investors would want to monitor the progress on this going ahead.

Notwithstanding an improved outlook on asset quality, Bank of Baroda is yet to get a firm grip on its future stress. Its bad loans as a proportion of loans is still 9.14%. In the absence of forbearance from the Supreme Court standstill, bad loans would have been 9.33% of the loan book. Its watchlist of stressed loans, which was around 13,000 crore as of June, hasn’t reduced by much in the September quarter.

The lender is aware of this and that explains its heightened provisioning, not just in the September quarter but also in previous quarters.

As of end September, the bank had put 1,748 crore toward specific covid-19-related risks. It has also set aside 9,792 crore toward accounts wherein it took the forbearance due to an ongoing petition in the Supreme Court. Its provision coverage ratio is 85%, one of the highest in the industry.

This means Bank of Baroda has enough insurance against potential risks. Its relative weakness compared with private sector peers has worked against its valuations though. The public sector lender’s stock has trailed the sector index and private sector peers so far this year.

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