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Home / Markets / Mark To Market /  Bank of Baroda shows resilience, but growth is some time away

India’s public sector banks have learnt their lesson on asset quality from the previous corporate bad loan cycle. Bank of Baroda’s December quarter performance showed that the lender could weather the pandemic’s impact better because of this.

For the third quarter, the second-largest public sector lender reported a net profit of 1,679 crore, which exceeded the median estimates of analysts by a big margin.

A healthy growth of 8.65% in its core interest income, largely due to the benefit of low cost of deposits, helped the bank’s profitability. But more than that, the lender’s proactive provisioning against the pandemic’s impact in the previous quarters seems to have saved the day.

Bank of Baroda reported an improvement in asset quality from the year-ago period, but loan growth remains tepid
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Bank of Baroda reported an improvement in asset quality from the year-ago period, but loan growth remains tepid

Its provisions fell 68% year-on-year in the December quarter, and the bank’s management said that most anticipated stress has been provided for. As such, delinquencies are more than what they seem to be with gross bad loans being at 9.63% of total loans, excluding the impact of the judicial standstill on bad loan recognition. Even so, at 85.46% provision coverage ratio, Bank of Baroda has little to worry.

The bank’s executive director, S.L. Jain, said that it holds excess provisions of 3,500 crore over and above the regulatory mandate against defaults. Pandemic-related stress and unreported bad loans due to judicial standstill have all been provided for.

To be sure, the bank expects fresh stress to emanate from retail and small business loans. Loans that came up for restructuring were at 9,501 crore, or 1.39% of its book. But these were largely from companies and not from retail borrowers.

In other words, Bank of Baroda’s provisions could rise in the coming quarters.

“We have seen a lot of corporate stress over the last three years. Anyone who is standing has a lot of resilience. Loans that have not been restructured post-covid give us a fair amount of confidence on quality," said Bank of Baroda’s managing director and chief executive officer Sanjiv Chadha in a call with the media. “But we do expect stress to come from retail and SMEs (small and medium enterprises)."

Even as it continues to fix its balance sheet, the bank’s Achilles heel is capital. Its capital adequacy ratio stood at 12.93%, close to the regulatory minimum of 11.5% effective from 1 April.

While stress may be less than anticipated, the lender needs capital to grow. Loan growth was just 8% y-o-y, beefed up by retail gold loans. Growth in the corporate loan book was tepid.

The bank plans to raise 3,000-4,000 crore through qualified institutional placement of shares soon, which should aid growth. Nevertheless, its capital ratios are close to the regulatory minimum and that would necessitate further fund-raising in FY22.

For now, investors need to watch Bank of Baroda’s growth trajectory even as bad loan management improves.

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