Growth hit, but asset quality improves at Bank of Baroda

Bank of Baroda’s loan growth was weakest to large companies and the share of corporate loans in overall book has come down in Q4. (Photo: Mint)
Bank of Baroda’s loan growth was weakest to large companies and the share of corporate loans in overall book has come down in Q4. (Photo: Mint)

Summary

Weak loan growth and interest reversal hit net interest income which shrank 5% on a sequential basis in Q4

In a year marked by a raging pandemic, even the strongest balance sheets suffer. Bank of Baroda Ltd was no exception when it came to growth and its core income.

The bank’s domestic loan growth at 4.9% reflected the weakness of the industry. Its international loan book shrank, bringing down the overall loan growth to a mere 2%. Bank of Baroda recorded a weak growth in loans to large companies and the share of corporate loans in its overall book has come down. This may put pressure on margins in the coming quarters to some extent. As such, net interest margin has narrowed despite the benefit from a sharp drop in deposit rates for the bank.

Weak loan growth and interest reversal due to the Supreme Court mandating waiver of compound interest on all loans resulted in a hit to net interest income which shrank 5% on a sequential basis in Q4.

Turning a corner
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Turning a corner

But analysts have noted the improvement in Bank of Baroda’s asset quality, that too during a pandemic. The lender’s headline asset quality metrics showed significant uptick. Gross bad loans as a percentage of the total book reduced to 8.87% from 9.63% in the previous quarter and 9.4% a year ago.

Slippages for FY21 were far lower than that of FY20. To be sure, slippages were bunched up in the March quarter due to the judicial forbearance in force for the second and third quarter that prohibited banks to label defaulted loans as bad. Another comfort factor is that the bank has a hefty provisioning coverage ratio of 85%.

That said, special mention accounts (SMAs) or those loans that had repayment overdue more than a month remained elevated at around 4% of total loans. Its upgrades and recoveries continued to remain lower than written off loans. This is expected to keep the pressure on profitability in the coming quarters. The management has indicated a strong pipeline for recoveries in FY22 but this largely hinges on the successful resolution of insolvency accounts.

The bank’s shares dropped more than 3% on Monday because of the net loss it reported as against an expected net profit for the March quarter. The net loss of ₹1,046 crore was largely due to migrating to a lower tax regime. In doing so, the bank had to set aside ₹3,837crore as a one-time tax expense for assessing its deferred tax assets.

What works for the lender is its depressed valuation. The stock trades at a discount to its estimated book value for FY22, despite gaining 9% since April. Analysts see upside going forward as asset quality is expected to improve.

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