The second quarter results of most banks showed an improvement in bad loan ratios and Bank of Baroda (BoB) was no different.
Gross bad loans as a percentage of the loan book slipped to 11.16% for the September quarter from 11.4% in the June quarter and 11.35% a year ago. The bad loan ratio on a net basis fell to 5.05% from 5.46% a year ago, indicating that BoB hasn’t cut corners in provisioning. Indeed, provisions rose 13% from a year ago and its provision coverage ratio improved to 57.73%.
The lender has provided Rs162.94 crore towards the stressed accounts referred to under the Insolvency and Bankruptcy Code (IBC). It still needs to make a provision of Rs325.69 crore towards these, which it plans to do in the next two quarters.
Keeping with this asset quality improvement, BoB reported a drop in fresh slippages to Rs2,586 crore, half of what it reported in the June quarter. Its upgrades also improved slightly to Rs640 crore from Rs589 crore in the previous quarter.
But this is a trend observed across the sector, with most banks reporting improved bad loan ratios and reduction in slippages. Much of this was expected by investors too.
So where does BoB stand out, if it does?
Unlike the country’s largest lender State Bank of India (SBI), BoB reported a healthy double-digit growth in loans. While SBI’s loan book barely grew, BoB reported a healthy 11% growth in domestic advances. Even peers such as Punjab National Bank fell short here. Consequently, net interest income growth was healthy and operating profit growth of 13% stemmed from both core and fee income.
Further, the growth comes from lending to companies that have ratings above AA, which augurs well for future asset quality. This shows that BoB has not simply lucked out in growth but has also worked towards growing its core operations. Given these positives, the 36% drop in net profit could be easily forgiven by investors.
However, a niggling worry is from large write-offs. BoB’s write-offs for the quarter were eight times those of the same period last year at Rs1,728 crore. Unless this is an aberration, the lender’s asset quality outlook gets clouded. Write-offs gain significance especially since the bank has a large exposure to accounts flagged by the regulator to be resolved through IBC or through other routes since large haircuts are being anticipated from these loans.
For now, investors can hope BoB continues to repeat its performance, mending and lending in the coming quarters as well.