Bank of Baroda to strengthen balance sheet, focus on reducing net NPAs to below 3%

PS Jayakumar assumed charge as MD and CEO of Bank of Baroda in October last year when the banking sector, especially public sector banks, was grappling with bad loans. The enormity of the problem did not overwhelm him. Instead, he chose to take the bull by the horns, deciding to go in for accelerated provisions for bad loans to clean up and strengthen the balance sheet.

 In an interview to BusinessLine , Jayakumar talks about the transformation exercise that the bank has embarked on and which will be completed in two years. He expects the bank’s balance sheet to strengthen, net non-performing assets to come down below 3 per cent, increase market share, wring out synergies between the bank and its subsidiaries and international operations, and improve return on equity. Excerpts:

What transformation will stakeholders get to see in your bank?

 Our advantage of a pretty extensive distribution (5,330 branches and 8,975 ATMs) is going to get supplemented with more automated distribution systems (mobile/ Internet/ self-service e-lounges). We are going to see a lot of work around mobile/ phone based-banking facilities. We will start the transformation in the areas of human resources, governance, risk management, technology and digitisation. Then we have work around all the business verticals, getting better (innovative) products/ services. The transformation exercise will also look at all the international businesses and how to rework them. Further, we want to get the subsidiaries to dance/ work along with us. We want to have a strong balance sheet with adequate amount of reserves and capital, a lot of synergies working between the bank and its subsidiaries, between the international bank and the domestic bank.  So, this exercise is fairly huge. This is a journey we will see progress every quarter. It will run for 18-24 months before it gets completed.  

What effect will the transformation have on your ROE?

What we would like to see at the end of the two years is the bank is settled to a high growth rate, maybe a revenue growth of 20 per cent, a market share that is reasonable in every segment we operate in, high level of brand (recognition) and customer satisfaction and a deeper leadership pipeline. As far as return on equity (ROE) is concerned, we want to come up to 15 per cent. As of March-end 2016, it was negative. In the pervious year, it was 9.21 per cent. This year, we are working towards 7-8 per cent ROE. We should look at 15 per cent in the next two years. The multiples will happen (go up), valuations have to be higher and that would help us raise more capital and do more business. 

How are you going about exorcising the ghost of bad loans?

 Ratios sometimes tend to mislead. So, what we are looking at is the net non-performing assets number as well as the absolute amount of net NPAs. We have basically broken down our recovery efforts into four groups — there is a group of people focused on dealing with recovery from written-off accounts; there is a group that focuses on all cases where things are in transit and therefore we need to take the processes around them; there is a group that is focused on retail business ; and then we have what we call as solutions group that is focused on bringing solutions to the challenges because they require restructuring solutions, find buyers, get equity capital, etc.

Eventually, banks have also got to recognise that their (provision) coverage ratio (PCR) has to be fairly strong because the ability to deal with the issues is also dependent on the extent of the coverage ratios. So, we have moved to a PCR of 60 per cent as of now (up from 52.70 per cent as at December-end 2015). And we would continue to try to increase this coverage ratio whenever we get the opportunity to do so.

As of March-end 2016, our net NPAs were at 5.06 per cent. We have to get to a level of less than 3 per cent in the next two years at least. This would come through a combination of growth (in assets) and reduction (through recovery, upgradation, etc).

When the government is ready to infuse capital, why do you want to sail under your own steam?

Our capital adequacy ratio is very strong and we have got lot of investments which we can liquefy should we need to do so. So, to start with a high capital adequacy ratio, the risks of dilution therefore are lower. And since we have gone a long way to recognise the NPAs and made provisions for them, we are in a pretty good position overall. …So, that is how we are looking at it. And because we have so many lines of defence and there are number of optimisation opportunities, really the analysis is not suggestive of any increase in capital. But if the bank is re-rated, growth numbers pick up, valuations change then nobody will object us going to the market. Re-rating of our bank should happen over the next two years. We don’t need capital immediately.

What are your deposit and loan growth targets for FY2017?

We are hoping to grow the current account and savings account (CASA) by about 15 per cent. Last year we achieved 12 per cent. This year, because we are investing in products, we hope we can move CASA up. On the lending side, we want to focus on clients with whom we can have a long-term and a more complete relationship... Relationship with the client has to be direct, it should be broad-based, add value to them and earnings to us. What we are thinking is let us at least get back to where we were in FY2015. And at that point of time we had an operating profit of ₹9,915 crore. This year we had ₹8,816 crore. So, we have to get there to start with.  

We will look at growing our balance sheet by about ₹25,000 crore (advances) because that is the amount of earnings we have lost as assets moved from performing to non-performing category in FY16. So, we want to catch up with that. So, there will be improvement in the quality assets we have got. But we have certain types of assets which we are now unwinding or potentially unwinding from. For example, we have ₹65,000 crore of buyers’ credit, which gives us little money. So, there will be re-pricing and we have to see the effect of that and how it plays out. But they will not have material impact on the net interest margin. We are targeting an end of period net interest margin (by March-end 2017) of closer 3 per cent (from the current reported number of 2.10 per cent).

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