Bank of Baroda's strong Q2 results instills confidence in investors

Bank of Baroda | Photo: Shutterstock
The September quarter (Q2) results of Bank of Baroda (BoB) is among the best in recent times. PS Jayakumar, the lender's MD & CEO since October 2015, and his team have walked the talk on improving the bank’s asset quality. While most government-owned banks (PSU Banks) have seen this metric bettering in Q2, BoB outperformed the pack with 20.6 per cent year-on-year reduction in bad-loan provisioning costs and slippages of Rs 22.8 billion coming in at seven-quarter low. Total provisioning cost stood at Rs 24 billion, up 4.3 per cent year-on-year, due to the impact of mark-to-market (investment) losses.

Asset quality, on the whole, remained decent with gross non-performing assets (NPA) ratio softening by 68 basis points (bps) sequentially to 11.8 per cent, while net NPA ratio fell to 4.86 per cent – down 54 bps, compared to June’18. Loan growth at 12 per cent, front-ended by 20 per cent growth in domestic book lifted Q2’s operations. Auto and home loans grew by 38 – 40 per cent each year-on-year in Q2.

Consequently, net interest income grew by 20.8 per cent year-on-year to Rs 44.93 billion, while net profit expanded by 19.7 per cent to Rs 4.3 billion in Q2. Profitability or net interest margin also rose by 30 basis points year-on-year to 2.6 per cent. Analysts at Prabhudas Lilladher say there is scope for further improvement in margins as December quarter would see in some large recoveries from defaulted accounts. The ongoing liquidity shortage has also placed banks in a better position to pass costs escalation to customers.

While these positives instil faith in the BoB stock, key earnings numbers are a shade below estimates because of 22 per cent year-on-year dip in non-interest income, on account of investment losses. Consequently, the stock’s post results reaction was also subdued with gains of 1.4 per cent on Wednesday. BoB announced its numbers after Tuesday’s market closing.

There is also a question mark on the sustainability of Q2’s show, thanks to its Rs 45 billion exposure to the troubled IL&FS group. The bank has set aside just Rs 2.5 billion towards the account in Q2. Analysts at Nomura believe that IL&FS related provisioning could be higher in the subsequent quarters of FY19. 

Likewise, while the current market price of BoB stock captures the overhang of the merger with Dena Bank and Vijaya Bank, the Street awaits the announcement of swap ratio. Till then analysts prefer to be in the sidelines, despite its benign 0.8x FY20 book valuation.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel