Q3 Comment | Why Bank of Baroda Q3 performance suggests more pain ahead

The road ahead for Bank of Baroda after its merger with Vijaya Bank and Dena Bank, was expected to be riddled with challenges. The third quarterly results of the bank after its merger only suggests that there is more pain ahead for the state-owned lender.

Bank of Baroda posted a loss of ₹1,407 crore in the latest December quarter, on the back of a sharp rise in bad loan provisions. Fresh addition/slippages to NPAs shot up to an unsettling ₹10,387 crore during the quarter, of which ₹4,509 crore was on account of divergence (with respect to FY19).

The bank’s still large stressed assets book of ₹10,500 crore and sharp write-offs of about ₹5,400 crore are indicative of the persisting stress in the bank’s book. Weak core performance and the fact that the Centre had to infuse ₹7,000 crore into the bank during the previous September quarter (eroded to some extent by the December quarter loss), suggests that the worst is not yet over for the bank.

Merger woes

The first quarterly results (in the June quarter) of Bank of Baroda after its merger with Vijaya and Dena Bank, had revealed tell-tale signs of stress on profitability and asset quality, as a fallout of merging with a weaker and under-capitalised bank (Dena). The pain appears to have only accentuated in the December quarter, owing to merger overhang and ongoing stress in certain corporates and sectors.

In the June quarter, the bank’s slippages stood at ₹5,583 crore. This went up to ₹6,000 crore in the September quarter. In the December quarter, slippages have spiked to ₹10,000-odd crore, predominately coming from its exposure to certain NBFCs, power and chemical companies. The RBI’s risk based assessment for FY19 also revealed divergence to the tune of ₹5,250 crore in GNPAs.

The bank’s bad loan provisions shot up by 47 per cent YoY in the December quarter, leading Bank of Baroda into the red.

While the defaults in specific corporate accounts and the divergence are one-off trends, there are several factors that suggest more pain in the coming quarters.

One, Bank of Baroda has a large bad loan book of about ₹73,000 crore as of December 2019, which is likely to keep provisioning high in the coming quarters.

Two, the bank’s stressed assets book remains high, despite the fall during the December quarter. At ₹10,500 crore, the watch list is significant, and slippages can lead to higher provisioning.

Three, rather than recovery, the reductions in bad loan book has been due to sharp-write-offs. Write-offs mean that banks fully provide for bad loans (taking a knock on profits) and take them off the books. From ₹4,500 crore in the June quarter, write-offs have risen to ₹5,459 crore in the December quarter.

Unless recoveries on large accounts happen, earnings could be under pressure in the coming quarters. Bank of Baroda has about ₹50,000 crore exposure to accounts under IBC, against which it has made 89 per cent provisioning.

Weak core performance

On the core performance front, Bank of Baroda’s credit growth has been muted over the past three quarters. After domestic advances grew by subdued 6 per cent in the September quarter, they have been flat (0.2 per cent growth) in the December quarter. Further consolidation of loan book would continue to weigh on core earnings.

The bank’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 post-merger, owing to steep cost to income of Dena. At 49.7 per cent in the December quarter, the cost to income ratio remains high and further rationalisation of costs is needed to boost earnings.

Finally, one year after the merger, the Centre had to pump in ₹7,000 crore into the bank to bolster its capital ratios. Bank of Baroda’s Tier-1 capital which had been in the 10-11 per cent range until March 2019, had fallen to 9.5 per cent in the June quarter.

The government had infused ₹7000 crore in the bank during the September quarter. This helped the Tier-I ratio to climb to 11.4 per cent in the December quarter. But continued pressure on earnings from bad loan provisioning, could erode capital. Further capital infusion by the Centre is likely in the coming quarters.