Bank of Baroda: Asset quality woes may not be over ye

Bank of Baroda (BoB) stock surged 17% on Monday to Rs 169.65 as the bank surprised the street with better-than-expected asset quality in the March 2015 quarter.

Both gross non-performing assets (NPA) and net NPA ratios improved sequentially. While gross NPA fell 13 basis points sequentially to 3.72%, net NPA contracted 22 basis points sequentially to 1.89%.

Fresh slippages that stood at Rs 1,359 crore were the lowest in the four quarters of FY15. Higher provisioning (up 44% sequentially and 57.6% year-on-year) to Rs 1,818 crore aided asset quality ratios to some extent.

The jump in provisions was largely due to a 134% year-on-year surge in provisioning towards NPAs and bad debts written off, to Rs 1,491 crore. While the street cheered the bank's improving asset quality, sustained improvement in this metric is some time away. Part of the share price gains could also be attributed to the near 15% fall between May 5 and 8.

BoB management continues to witness stress in the environment and indicated that improvement in asset quality in the quarter was better than management expectations.

Management stated that more restructured assets are struggling to become solvent and that asset quality pressure is unlikely to ease over the next six months - at least; in view of uncertain economic climate and presence of a few lumpy accounts. Management remained cautious and said they would be very happy if current asset quality ratios are maintained going forward.

Slowing loan growth, weak net interest income (NII) growth, higher provisions as well as tax rate impacted BoB's net profit in the March quarter, which fell by 48.3% year-n-year to Rs 598 crore.

This was 37% below Bloomberg consensus estimate of Rs 955 crore. Although BoB's domestic net interest margin were down slightly due to falling domestic yields, NII grew a mere 1.5% year-on-year to Rs 3,172 crore.

This was its lowest growth since the September 2013 quarter and was impacted by weak loan growth of 7.8%, which again is lowest in past 8-10 quarters.

Analysts like Vaibhav Agrawal of Angel Broking however believe that banks having seasoned loan book are more likely to witness early improvement in asset quality trends. He believes BoB is well placed in this light and the asset quality improvement outweighs the miss on net profit in the quarter.

In the quarter, other income fell marginally to Rs 1,295 crore due to weak recoveries from prudentially written-off accounts. The recovery was down 83.44% to Rs 60 crore and negated a four-fold year-on-year rise in trading gains to Rs 360 crore.

The bank's tax rate jumped from 18% in year ago quarter to 31.7% on account of discontinuation of reduction of deferred tax allowed earlier. Going ahead, tax rate is likely to remain elevated.