PremiumShares of public sector banks have been climbing since April despite the second covid wave on hopes that lenders are poised to capture the next corporate loan growth cycle as legacy bad loans decline.
Bank of Baroda’s June quarter (Q1FY22) metrics ticked most of these boxes with a healthy operating performance and an asset quality devoid of nasty surprises.
However, the sharp contraction in its corporate loan book that led to a near 3% contraction in its overall domestic loan book was enough to worry investors. The 2% fall in the lender’s shares on Monday reflect this worry.
The lender’s corporate loan book dropped a massive 12% year-on-year (y-o-y) and was down 11.5% sequentially. The lender let go of low-yielding corporate loans, the main driver behind this fall. The bank is hopeful that corporate loans would show a decent growth in the current financial year and sees growth opportunities in roads, renewable energy, and oil and gas sectors.
Retail and small business loans showed robust growth for the June quarter, which augurs well for the bank’s full year growth outlook.
Even so, the sharp increase of 38% y-o-y in gold loans could be a matter of concern.
The bank’s weak spot in growth was corporate loans, but its biggest strength in asset quality resilience also comes from the same segment. An upbeat outlook on asset quality rode on the minimal corporate slippages during the quarter.
“The high share of corporate loans, which has been resilient to covid, is aiding the bank, leading to lower headline slippages," pointed out analysts at Kotak Institutional Equities.
That said, fresh slippages remained elevated at ₹5,129 crore for the bank, and retail and small business accounted for most of this. Indeed, the second wave has adversely affected individual borrowers and small and medium enterprises, which showed on Bank of Baroda’s balance sheet too.
What works for the bank is its low share of retail loans in the overall book, which is dominated by loans to large companies. Therefore, analysts expect the bank’s slippages to remain under control and incremental provisions to remain modest as well. As such, the bank’s provision coverage ratio is at a high 83%.
In a nutshell, Bank of Baroda’s profitability is poised to improve from here on, notwithstanding the pandemic. For the June quarter, the public sector lender swung to profit after reporting a net loss in the previous one, helped by a healthy growth in core interest income and a reduction in provisions.
Net interest income grew by 11% sequentially and showed a larger growth of 16% y-o-y mainly on low base. Improvement in net interest margin and healthy recoveries buoyed core income even as the loan book contracted.
However, investors need to note that the bank’s restructured loan pile has increased and is now roughly ₹25,000 crore or 3.2% of the book. As such, the gross bad loan pile at 8.9% of the loan book is not small. Another potential infection wave that may trigger lockdowns poses a key risk to its small and medium enterprises (SME) loans.
While analysts are hopeful that slippages from both the retail and SME may normalize, the trend here needs to be watched.
Until then, the underperformance of the bank’s shares vis-à-vis its public sector peers such as State Bank of India does leave room for an upside
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