Mumbai:
Shares of Bank of Baroda (BoB) plunged as much as 14 percent to Rs 187.90 on
Friday after the lender showed a 68 percent dip in its net profit for the
quarter ended 30 December. BoB net profit fell to Rs 334 crore from Rs 1,045
crore in the year ago quarter.
The main reason for such a sharp fall in the net profit
figure is a substantial rise in the provision made on bad loans and a major
surge in the tax expenses due to the Dubai income tax levy, as explained by BoB
officials in the post result press conference.
While the tax expenses are more of one-off hit, what worried
the investors more was the sharp deterioration in the asset quality of the
bank, which has more or less maintained a good asset quality trend in the past,
and the subsequent rise in its provisions. This is something that certainly
warrants high caution.
As Firstpost has
noted before, state-run banks continue to feel the pinch of weak corporate
health in a faltering economy, also a reflection of the true state of progress
of economic activity on the ground.
BoB’s gross bad loans, for the December quarter, rose to Rs
15,452 crore in the December quarter, up 18 percent, from Rs 11,925 crore in
the year ago quarter and Rs 13,057 crore in the preceding quarter. In
percentage terms, gross NPAs now constitute 3.85 percent of the total loans of
the bank compared with 3.32 percent in the corresponding quarter last year.
The worrying part is that the incremental slippage number
doesn’t show any improving trend. In the quarter alone, BoB registered Rs 3,042
crore fresh slippages as compared with Rs 1,758 crore in the preceding quarter.
The bank wrote off Rs 328 crore in the December quarter and
made a recovery of Rs 238 crore. Tax expenses made in Dubai stood at Rs 375
crore that also contributed to the overall decline in the profit numbers.
BoB's loan growth trend has remained muted in a slow growing
economy, where new projects are yet to come up and the existing stalled ones
are still waiting for clearances.
One of the reasons for the high bad loan numbers is the new
norms from the Reserve Bank of India regulations on the bad loan recognition.
In the past, a loan account become bad only when there are
no payments for a period of three months. As against this, banks now need to
recognise stress on their books fro individual accounts much earlier (if repayments
are overdue between (31-60 days) when they see early signs of repayment
difficulties.
Due to this, banks prefer to recognize bad loans earlier,
instead of postponing it. This has probably contributed to the sharp decline in
BoB numbers.
According to BoB officials, the bad loan additions are
likely to continue for one or two quarters more.
Even other state-run most state-run banks, which have
reported their numbers so far, have logged a visible worsening of their
accounts underlining the persisting stress on the economy.
Vijaya Bank, another state-run bank that reported earnings
on Friday, too showed a significant rise in its bad loan levels to 2.92 percent
of total loans from 1.88 percent in the preceding quarter. The bank saw fresh
slippages of Rs 728 crore in the December quarter as against recovery of Rs 500
crore.
Total stressed assets of the banks, which include
restructured loans, stands about 8 percent.
Early this week, state-run, Union Bank of India too reported
a 13 percent drop in its net profit to Rs 302 crore in the quarter on a
year-on-year basis on account of a substantial rise in the provisions made on
bad loans.
Clearly, state-run banks haven't been able to break the jinx
of bad loan addition just yet. As compared with this, private sector banks have
reported good set of numbers.
The current situation of bad loan addition on the books of
state-run banks is unlikely to get better in the foreseeable future. A
significant chunk of loans given to infrastructure companies and small and
medium sized firms continue to remain under stress.
Even one assumes that the economic recovery happens from
now, there will be a lag effect for this to get translated into corporate
health and good cash flows. The persisting stress is quite visible both on the
bad loans and restructured loans levels of banks. Together, such stressed
assets constitute over 10 per cent of the total loans given by banks.
The only silver lining is the relatively lower number of
fresh references received for loan recasts in the December quarter. If the
recovery takes firm roots in the economy sooner than expected, can help improve
the corporate health and the stress level can come down.
There haven’t been any significant investments on the ground
till this point despite the improving investor sentiments. For now, state-run
banks continue to be under stress, which would add to their capital burden and
hamper profitability.
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