BoB’s second quarter show leaves a lot to be desired


The performance of the Bank of Baroda (BoB) in the September quarter did not have much to celebrate. Of course, net income grew 24% year-over-year (year-over-year), and the bad debt stock also declined. Management gave an optimistic outlook on growth and asset quality for the remainder of the year.

That said, the bank’s shares fell nearly 5% in the last hour of trading after the results were announced. The rather modest growth of 2.11% in net interest income and the high slippages seem to have worried investors. Given the disappointing growth in core interest income, operating profit also showed moderate growth of 5.76% year-on-year and remained stable sequentially.

This is in part due to the lukewarm 2.99% increase in the lender’s loan portfolio. The Bank of Baroda’s domestic loan portfolio was supported by a double-digit expansion of its retail loan portfolio. In the retail sector, too, riskier unsecured personal loans, auto loans and gold loans were the fastest growing. Unsecured loans increased 33%, while gold loans increased 35%. Home loans grew at a modest 5.09% year-on-year.

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Hits and misses

True, management has said that the unsecured wallet and even auto loans have performed well over the past two years, despite the pandemic. “We saw this portfolio perform in the first and second waves. Delinquencies have been low despite the challenges, ”CEO Sumit Chadha said on a conference call with reporters after the results. The bank is comfortable with the rapid growth of these portfolios, he added. Small business loans have also been shown to be healthy. growth although this cohort is the most vulnerable to the impact of the pandemic. Loans to micro, small and medium enterprises increased by 4.12%, and the lender expects the performance of this portfolio to be stable.

This brings us to the book of business loans. Most banks reported weak single-digit growth in their business loan disbursements, and some even reported a contraction. Bank of Baroda’s business loan portfolio had been stable for a year. Note that the portfolio posted a sharp contraction of 11% during the June quarter. Chadha said that disbursements in this segment are currently on the rise and the use of working capital sanction limits will increase in the coming quarters.

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

A resumption of growth in business loans would be key to showing decent growth in the loan portfolio in FY22, not only for the Bank of Baroda, but for other lenders as well. It’s not as easy as it sounds. Capacity utilization remained below 70% in the latest round of Reserve Bank of India (RBI) surveys. Indeed, bankers, including Chadha, stressed that the growth of term loans will not be easy as businessmen are still reluctant to increase investments. In short, companies are reluctant to increase their capacities or create new factories. Bankers are mainly counting on a slight increase in working capital loans.

As the loan portfolio did not increase much for the bank, the decrease in the bad debt stock appeared small in terms of ratios. The gross bad debt ratio edged down to 8.11% for the September quarter. But it’s not just the optically weak improvement in asset quality. Investors would be right not to give up their worry about stress on the lender. The landslides remained high at ??5,223 crores due to the slippage of a single large business loan account. The lender has ??20,000 crore in restructured loans, or 2.8% of its loan portfolio. In addition, the radiations also remained high at ??5213 crores. While management has assured that the quality of its fast-growing retail portfolio is impeccable, it is clear that unsecured loans do not hold up well in times of stress. Since the stress decreased only slightly, the loan loss provisions increased even though the overall provisions decreased by 2%.

The September quarter performance does not appear to justify the 16% rally in the bank’s shares over the past month. For valuations to hold, the Bank of Baroda would simply have to stick to the outlook it has set out.

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