Technology

Bank of Baroda (BoB) took aggressive steps to clean up its balance sheet and
recognized all the RBI identified weak accounts as NPA during the quarter
(3QFY2016). Consequently the provisions went up substantially and the bank
reported a loss of Rs3,342cr.
Substantial rise in provisions and decline in loan book resulted in loss at the net
level: During the quarter, the loan book declined by 2.4% yoy, while deposits grew
by 4.4% yoy. CASA deposits declined by 5.1% yoy and as a result the CASA ratio
declined to 24% vs 26.4% in 3QFY2015. Provisions went up 2.5x qoq and hence
the bank reported a huge loss of Rs3,342cr compared to a PAT of Rs334cr in
3QFY2015 and of Rs124.5cr in the sequential previous quarter. However, as the
bank has now recognized a large part of the troubled accounts and taken provisions
accordingly, we expect the profitability to improve from 1QFY2017 onwards.
Early recognition of stressed assets gives better clarity: BoB is the only bank in the
PSU space which has recognized all the AQR related accounts as NPAs. Further it
also has recognized certain stressed accounts as NPA during the quarter; as a
result the gross slippages went up substantially to Rs15,785cr. However, this gives
better clarity on the asset quality of the bank. The Management doesn’t expect
much pain in terms of asset quality, going ahead. The Gross NPA ratio went up
substantially to 9.68% from 5.56% in 2QFY2016 (up 412bp qoq), while the Net
NPA ratio stood at 5.67% vs 3.08% in 2QFY2016. BoB has recognized a majority
of its 5:25 and SDR accounts as NPAs; hence, most of the pain in terms of asset
quality now seems to be through for the bank.
Outlook and valuation: BoB is the only large PSU bank to have recognized all the
AQR accounts as NPA during the quarter. The Management’s intention to clean
up its balance sheet faster than others gives more clarity about the bank’s growth
prospects, going ahead. The bank is well capitalized with a CAR of 12.2% and
believes it will not need any fresh capital for the next 18-24 months. At the current
market price, the stock trades at a valuation of 0.9x FY2017E ABV. Although there
is more clarity on the bank’s asset quality now, in our view, the bank is trading at
a higher valuation multiple compared to its peers. Hence, we maintain our
Neutral view on the stock.

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