BoB’s Q2 show leaves much to be desired

That said, shares of the bank tumbled nearly 5% in the final hour of trade after the results were declared. The rather modest 2.11% growth in net interest income and elevated slippages seem to have worried investors. Given the underwhelming growth in core interest income, operating profit also showed a subdued 5.76% y-o-y growth and was flat sequentially.

Part of this is due to the tepid 2.99% increase in the lender’s loan book. Bank of Baroda’s domestic loan book was propped up by a double-digit expansion in its retail loan book. Within retail, too, the riskier unsecured personal loans, auto loans and gold loans showed the fastest growth. Unsecured loans grew 33%, while gold loans expanded 35%. Home loans grew at a modest 5.09% y-o-y.

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To be sure, the management has said that the unsecured portfolio and even auto loans have performed well over the past two years, despite the pandemic. “We have seen this portfolio perform through the first and second waves. Delinquencies have been low despite challenges," said Sanjiv Chadha, managing director in a post-earnings conference call with journalists. The bank is comfortable with the fast-paced growth in these portfolios, he added. Small business loans, too, have shown healthy growth despite this cohort being most vulnerable to the pandemic’s impact. Loans to micro, small and medium enterprises grew by 4.12%, and the lender expects the performance of this portfolio to be steady.

That brings us to the corporate loan book. Most banks have reported low single-digit growth in their corporate loan disbursements, and some have even reported a contraction. Bank of Baroda’s corporate loan book was flat from a year ago. It should be noted that the portfolio had shown a sharp 11% contraction in the June quarter. Chadha said disbursals in this segment are looking up currently, and the use of working capital sanction limits would increase in the coming quarters.

His comments resonate with similar statements by chiefs of other banks. “We are seeing some activity in brownfield projects, in sectors such as steel. Unlike in the past, where we saw new players, this time strong existing companies are coming with investment plans. So, the quality of these loans would be good," Chadha said.

Revival in corporate loan growth would be critical to show a decent loan book growth in FY22 for not just Bank of Baroda but also other lenders. This is not as easy as it seems. Capacity utilization has remained below 70% in the latest round of the survey by the Reserve Bank of India (RBI). Indeed, bankers, including Chadha, pointed out that growth in term loans won’t be easy as businessmen are still shy to increase investments. In short, companies are reluctant to increase capacity or set up new factories. Bankers are relying primarily on an uptick in working capital loans.

Since the loan book didn’t expand much for the bank, the fall in bad loan stock appeared small in terms of ratios. The gross bad loan ratio slipped slightly to 8.11% for the September quarter. But it is not just the optically dim improvement in asset quality. Investors would be right for not abandoning their worry over stress as far as the lender is concerned. Slippages remained elevated at ₹5,223 crore due to the slippage of a single large corporate loan account. The lender has ₹20,000 crore worth of restructured loans, which is 2.8% of its loan book. Further, write-offs remained elevated as well at ₹5213 crore. While the management has assured that the quality of its fast-growing retail book is impeccable, there is no denying that unsecured loans don’t hold up well during stress periods. Since stress has reduced only marginally, loan loss provisions increased even though overall provisions fell 2%.

The September quarter performance does not seem to justify the 16% rally in the bank’s shares over the past month. For valuations to stick, Bank of Baroda would need to just deliver on the outlook it has laid out.