Q2 COMMENT. BoB: Slippages moderate, but earnings growth remains muted

Certain trends in the performance of leading public sector banks in the latest September quarter have been similar — lower slippages, higher provisioning and muted or lower-than-expected growth in net profit.

Bank of Baroda’s results are more or less on similar lines. Slippages nearly halved from the previous quarter, leading to a marginal 20-odd basis points sequential fall in gross non-performing assets ratio (as a per cent of loans).

An increase in provisions, however, offset the somewhat healthy growth in operating profit, leading to a decline of 35 per cent year-on-year in net profit in the September quarter. Like its peers SBI and PNB, the bank’s large bad loan book is worrisome, but its relatively better core performance sets it apart.

What’s eased? The pace of slippages for Bank of Baroda fell notably in the September quarter. From ₹4,384 crore in the June quarter, fresh slippages stood at ₹2,586 crore in the September quarter. While this is a positive, there are some points to note.

For one, slippages for the September quarter have inched up from the levels seen in the same quarter last year (at ₹2,252 crore). Two, the significant reductions in the stock of GNPAs in the September quarter was mainly due to write-offs, rather than recoveries or upgrades.

Write-off is a process wherein banks stop recording the bad loans in the books and take a hit on their profits by fully providing for such loans. From ₹35 crore in the June quarter, write-offs moved up sharply to ₹1,768 crore in the September quarter.

Hence, the sustainability of moderation in accretion to bad loans will need a watch in the coming quarters.

Just as for SBI and PNB, the provisioning requirement has gone up for Bank of Baroda too in the September quarter. Ageing of bad loans (a large book at that) has led to incrementally higher provisions for leading PSBs.

The bank’s bad-loan provisions went up 13 per cent year-on-year in Q2. Provision for standard loans too have more than doubled. The bank has made provisions for ₹163 crore for accounts under NCLT. The remaining ₹326 crore will be provided in the coming two quarters.

Hence, higher provisioning could continue to impact earnings.

For SBI, loan-loss provisioning had gone up to ₹16,715 crore in the September quarter from ₹12,125 crore in the June quarter, despite slippages moderating. For PNB, bad loan provisioning went up by 64 per cent y-o-y.

Better core performance Bank of Baroda has, however, scored relatively better than its peers on the core performance front. The bank’s net interest income grew 8.5 per cent in the September quarter, after a modest 0.98 per cent growth in the June quarter.

This was backed by healthy growth of 13.8 per cent in domestic advances, driven by 25 per cent growth in retail loans.

SBI’s net interest income grew a muted 2.5 per cent in Q2, on the back of flat advances. PNB’s net interest income grew 3.5 per cent on the back of 4.5 per cent growth in overall loans (domestic growth at 8.3 per cent).

COMMENT NOW