Last year, stocks of most public sector banks have taken a beating due to mounting asset quality risks. But in the last two quarters, the asset quality of a few banks has improved, thanks to containment of slippages and lower additions to restructured book.

Bank of Baroda is one such bank. It has been focusing on higher growth segments, such as retail and SME, to drive loan activity. This, along with a lower proportion of high-cost bulk deposits, has helped the bank improve its margins. It is also better capitalised than most PSU banks, with a tier 1 capital of 8.7 per cent.

The Bank of Baroda stock has lost 22 per cent over the last year. At the current price of ₹550, it trades at 0.7 times its one-year, forward-adjusted book value, lower than the historic average of 1.1 times. Investors with a two-to-three-year horizon can consider buying the stock.

Fresh slippages down As of the December quarter, Bank of Baroda’s gross non-performing assets stood at 3.3 per cent of loans, up 17 basis points over the previous quarter.

However, tracking its performance over a longer period, the bank has been able to reduce additions to bad loans and restructured assets, which had worsened in the third quarter of 2012-13.

Loan defaults were down from ₹1,960 crore in the June quarter to ₹1,553 crore in the December quarter. Incremental restructuring has also been on a downtrend; from ₹2,147 crore in the June quarter to ₹1,213 crore in the December quarter.

The reduction in non-performing assets was purely on account of upgradation and recovery of bad loans, rather than write-offs. Write-off is the process in which banks stop recording a bad loan in their books and take a knock to their profits by fully providing for such loans. The management expects asset quality to further improve, with better recovery and containment of slippages.

Retail focus Bank of Baroda has a strong presence in industrially-advanced regions such as Maharashtra, Gujarat and South India. After growing annually at 26 per cent between 2009 and 2012, the bank’s loan growth slowed to 14 per cent in 2013.

Since the bank lends mainly to corporates the slowdown and lack of fresh investments in the corporate segment impacted its growth. The share of large and medium enterprises in BoB’s loan book fell to 32 per cent in December 2013 from 36 per cent in the previous year.

To offset the slack in the corporate segment, the bank has been focusing on higher growth segments such as retail and SME. After languishing at 12 per cent in the beginning of 2013-14 (June quarter), growth has picked up since September, thanks to retail and SME loans bucking the slowdown trend in the corporate segment. Driven by retail (21 per cent growth) and SME (39 per cent), Bank of Baroda’s overall loan growth as of December 2013 stood at 18 per cent.

Stable margins

This shift in focus has also helped the bank stabilise its margins. Domestic margins were on a downtrend since the third quarter of 2012-13, due to imbalances in the loan-deposit mix. Loan growth, at 10-11 per cent, lagged deposit growth of 16 per cent, translating into a low loan-to-deposit ratio of 66 per cent. With not enough funds deployed for lending, the margins were impacted.

But since the September quarter, the bank has managed to improve its loan growth. This has led to a marginal improvement in margins in the December quarter. After muted growth in net interest income in the last three quarters, there was pick-up in the December quarter.

The bank is expected to maintain steady growth, higher than the overall banking credit growth, through its focus on the retail and SME segments. Its loan book is expected to grow 16 per cent in 2014-15.

The bank has been shedding its high-cost deposits to reduce cost of funds. In the first nine months of 2013-14, it shed close to ₹27,939 crore of such deposits. The share of low-cost domestic current account, savings accounts (CASA) in total deposits now stands at 32 per cent, compared to 30 per cent in March 2013.

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