Behind Bank of Baroda’s net loss is prudence, but outlook looks cloudy

In tandem with most of its peers, Bank of Baroda chose to take a hit on its profits for the sake of safety.

The public sector lender reported a net loss for the June quarter as it provided against various bad loans and future risks, including some of it for regulatory compliance.

Indeed, the bank’s provisions surged 71% year-on-year and not all of it was due to covid-related risks.

The lender had major trouble with international loan accounts where slippages jumped to 2,121 crore in the June quarter due to three chunky accounts. It also made provisions against an account where 75% of its amount was backed by government guarantee.

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Batting for safety

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Managing director Sanjiv Chadha explained that the provision was a regulatory requirement as the resolution for the account could not be put in place within the stipulated time. “We had to make the provision because the 7 June circular does not differentiate between loans having government guarantee and those that do not have one,” he said in a media call.

So, should investors view the net loss as a reflection of the bank’s troubles or as an outcome of prudence?

That would depend on whether the bank can deliver on its assurances. The management has assured that the bank would see provision write-backs in the coming quarters. It expects a recovery of not less than 13,000 crore for FY21. In the June quarter, recoveries were a mere 900 crore.

Moreover, the loan book under moratorium has reduced to 21% from as much as 60% in April.

The bank believes that loans under moratorium are not stressed and it has classified them conservatively. The bank said that with the one-time restructuring announced by the regulator, its provisioning needs would considerably reduce in the coming quarters.

That said, there is little in terms of outlook on asset quality. The bank refrained from indicating how much of its loan book could eventually get restructured.

Forbearance aside, restructuring skews the visibility of stress on a bank’s loan book. To that extent, investors would want to be cautious on the coming quarters.

What stood out was also the fact that the bank wants its deposit growth to be similar to loan growth. “We want to have deposits that are high quality and we want to increase our CASA. But mostly, we want to align our deposit growth with our loan growth,” said Chadha.

PSB chiefs have time and again brandished their balance sheet numbers, especially the liabilities as a key strength. But Bank of Baroda wants its assets to grow as much as its liabilities. While investors should appreciate this sign of efficiency, what would matter is how the bank manages its loan book risk.

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