The Bank of Baroda
(BoB) stock, like those many public sector lenders, was under pressure after the bank posted losses in the March quarter.
However, it has gained 30 per cent from early July on hope that the worst in terms of asset quality might be over for public sector banks
(PSBs) and, importantly, its own good performance in the June 2018 quarter (Q1), reported last Friday. With Q1 numbers showing asset quality improvement and pointing to better prospects, many analysts are positive on the bank.
In Q1, advances and net interest income grew 9.4 per cent and 28.7 per cent, year-on-year (y-o-y), respectively. Net profit more than doubled to Rs 5.28 billion. Besides, less of new slippages (loans turning bad) and better loan recoveries pushed the top line.
BoB reported a 62.3 per cent sequential and nine per cent y-o-y fall in slippages to Rs 47.3 billion. Moreover, 85 per cent of the slippages came from the March quarter’s watch list, leading to a 14 per cent fall in the total watch list to Rs 86 billion or two per cent of gross advances.
The share of A and above rated accounts moved up to 63.31 per cent of total advances in Q1, from 52.37 per cent in Q4. Currently, 74 per cent of the bank’s customers have strong a CIBIL score. These indicate minimum default probability, say analysts. Moreover, 83 per cent of the medium, small and micro enterprises (MSME) book (14 per cent of the domestic loan book) being standard as of end-June provides comfort.
Finally, a higher provision coverage ratio of 69 per cent indicates potential improvement in credit cost. Thus, BoB’s earnings are seen gaining momentum. “We expect the stock to re-rate as visibility on earnings delivery improves,” analysts at Edelweiss said in their Q1 results update.
The management also expects recoveries from two steel accounts to flow in the coming quarters, supporting operating parameters further. Analysts believe additional slippages from the stressed power and telecom sectors, if any, could be offset by expected recoveries. This, coupled with credit expansion (15-20 per cent in domestic loans) in FY19, driven by retail loans, would improve return on equity to 10-11 per cent, and keep investor sentiment firm.