BoB tides over asset quality pressure better than PNB

Bank of Baroda (BoB) and Punjab National Bank (PNB) have declared contrasting March-quarter results. While BoB delivered strong asset quality performance,PNB saw further deterioration in asset quality with a notable jump in gross non-performing assets (GNPA) and restructured book.

Both stocks have rallied sharply, over 70 per cent since September last year, banking on hopes of an economic revival with the formation of a new Government. But PNB’s fundamentals have a lot more catching up to do to justify the steep run-up in valuation.

PNB is among the banks with a very high level of stressed assets (GNPA + restructured) at 15 per cent of the loan book as on March 2014, with significant increases in fresh delinquencies and additions to the restructured book through the year. The bank’s loan recast is nearly 10 per cent of total loans, one of the highest in the industry. A chunk (45 per cent) of PNB’s loans still comes from large and mid-corporate segment, with exposure to stressed sectors such as infrastructure and metals continuing to remain high. The growth in loans for the year was driven by such stressed sectors; power grew 18 per cent, construction rose 31 per cent while iron and steel grew 25 per cent.

BoB, on the other hand, has been able to bring down additions to bad loans and restructured assets as it has lesser exposure to these stressed assets. Through monitoring and recovery of bad loans, the bank has contained asset quality pressure. Fresh slippages, which were at ₹1,960 crore in the first quarter of 2013-14, has come down to ₹1,295 crore in the March quarter. Incremental restructuring has also been on a downtrend; from ₹2,147 crore in the beginning of the year to ₹1,157 crore in Q4.

In fact, BoB which has primarily been a corporate lender, has been leaning towards the retail segment to drive growth to offset the slowdown in the corporate segment. The bank has the highest proportion of retail loans (17 per cent) within the public sector banks (excluding SBI.

Even if the economy does revive from hereon, immediate pick up in new projects and investments that can drive loan growth is unlikely. Hence, it will be critical for PSU banks to contain asset quality pressures in the next few quarters, before the recovery theme starts to play out and comes to their rescue.