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Bank of Baroda threw a pleasant surprise in its September quarter results by managing to contain the deterioration in its asset quality.
The smart rally in the stock after the earnings announcement reflects the relief of investors that the bank’s performance has now stabilised after three quarters of increasing non-performing assets and restructured loans.
With most private banks having delivered steady asset quality, the spotlight is now on public sector banks. Increasing bad loans, slower loan growth and declining profitability has been an overhang on most public sector banks in the past one year. It is, therefore, not surprising that Bank of Baroda soared on delivering improved loan growth, stable margins and lower slippages.
On the profitability front, the bank’s core net interest income had been dwindling in the last three quarters, owing to slowing loan growth and declining margins. While the net interest income for the September quarter has also grown by a modest one per cent, the fall in the domestic net interest margin (NIM) since the third quarter of last year, has been arrested. This has been due to correction in certain imbalances in the loan-deposit mix during the quarter.
A relatively higher deposit growth, led to lower loan to deposit ratio of 66 per cent in the past few quarters. This lower deployment of funds weighed on the bank’s margins. The bank managed to improve its loan growth during the September quarter to 16 per cent, from 10-11 per cent in the previous quarters by focussing on the retail segment
The bank has been shedding its high cost deposits to reduce its cost of funds. In the first half of this year, it shed close to Rs 25,742 crore of such deposits. The share of domestic current account savings account (CASA) improved from 30 per cent as of March 2013 to 32.6 per cent.
With the management expecting the worst to be over as far as deterioration in asset quality goes, retail focus and stable margins should drive better operational performance in the ensuing quarters.
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