The first quarterly results of Bank of Baroda after its merger with Vijaya Bank and Dena Bank, reveals some tell-tale signs of stress on profitability and asset quality, which was expected as a fallout of merging with a weaker and under-capitalised bank (Dena). Weak growth in core net interest income on the back of modest loan growth and margin pressure, elevated slippages, and a large stressed assets pool ---suggest that there could be more pain for the merged entity in the coming quarters.

On the face of it, the bank’s earnings coming back into the black in the June quarter may lend comfort to investors. Bad loans in absolute terms have also fallen marginally (from the March quarter), along with provisions in the June quarter. The merged entity reported a profit of ₹710 crore from a loss of ₹49 crore in the same quarter last year. Gross non-performing assets (GNPA) fell from ₹69,924 crore in the March quarter to ₹69,714 crore in the June quarter.

Forthcoming quarters

But digging into numbers suggest that earnings could be under pressure in the coming quarters on several counts.

One, the credit growth for the merged entity is a modest 6-odd per cent in the June quarter. While BOB’s standalone domestic book has grown by healthier 12 per cent, a near 9 per cent fall in loans of the other two banks has dragged the credit growth for the overall merged entity. Barring retail, all other segments have reported muted (decline in MSME loans) growth in the June quarter. Further consolidation of loan book and weak credit off-take in the corporate segment may continue to weigh on credit growth.

Two, BOB’s cost to income ratio (standalone) which stood at 45.5 per cent as of March 31, 2019, went up significantly to 53.2 per cent on a consolidated basis---owing to steep cost to income of Dena. At 49.2 per cent in the June quarter, the cost to income ratio of the merged entity is high and further rationalisation of costs is needed to boost earnings. Pressure on net interest margin (NIM) can continue to drag earnings. High cost of deposits of Vijaya Bank have impacted margins for the merged entity and domestic NIM fell from 2.9 per cent in the March quarter to 2.73 per cent in the June quarter. Reduction in deposit rates should aid NIMs, but increase in pace of lending rates cuts can add pressure on NIMs.

Three, while bad loans came down marginally in absolute terms, from the previous quarter, slippages remained elevated at Rs 5,583 crore in the June quarter. Also, write-offs were substantial at Rs 4532 crore. As such, slippage ratio which hovered in the 2.5 per cent range for BOB before merger has gone up to 3.3 per cent, owing to steep slippage ratio of Dena. GNPA ratio is an elevated 10.3 per cent, which could keep provisioning high in the coming quarters.

Stressed assets book also needs a close watch. In the March quarter BOB’s standalone stressed assets book (watchlist for FY20) stood at Rs 10,410 crore. The management has stated that 70 per cent of slippages in the June quarter, was from the watchlist of the amalgamated book. As of June, the watchlist of the merged entity is a large Rs 16,500 crore---slippages from this can lead to higher provisioning in the coming quarters.

Finally, BOB’s standalone Tier 1 capital which stood at 10-11 per cent in recent quarters, has fallen to 9.5 per cent in the latest June quarter. Substantial capital infusion by the Centre will be imperative to fund the bank’s growth and provisioning requirement, if slippages witness sudden spikes. Exposure of the merged entity to IBC accounts is Rs 37,144 crore and quick resolution of these accounts will be critical to ease the pressure on capital.

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