Wednesday, July 10, 2013

Can Bank of Baroda Enter Into a Growth Phase Soon?

Despite Finance Minister P Chidambaram urging banks to cut their base rates, and a couple of Mumbai headquartered banks like Bank of India and Union Bank cutting lending rates, Bank of Baroda's Chairman, SS Mundra, has opined that BoB will go for a rate cut only if deposit costs soften, and not because neighbour banks or peer banks are doing it.

When the winds of asset quality pressure started hitting Indian public sector banking sector almost two years back, there was only one public sector lender that withstood that pressure for the maximum time. It was ‘India’s International Bank’, Bank of Baroda. There were many reasons for BoB’s better asset quality.

Overseas operations accounted for nearly 30% of their total business. Bank of Baroda is present in 24 countries, including high-volume destinations like UK, UAE, USA, Singapore, Hong Kong, and Belgium. And majority of their overseas credit is in the form of syndicated loans, ECBs, and buyer‘s credit.

But the economic situation in India continued to worsen during these past two years, and the asset quality pressure ultimately affected BoB too, starting in Q3 of FY’13.

The huge responsibility of leading the bank through such difficult times fell on the shoulders of SS Mundra, who had taken over as CMD during that quarter. This veteran banker’s last assignment was as Executive Director of Union Bank of India.

But the longest part of his career - of over 3 decades - was spent at Bank of Baroda itself, and that has come in as a huge advantage for BoB as well as its new Chairman, in navigating these tough times. He has held key leadership positions in both the domestic and international operations of the Bank. For example, he has been the Zonal Head of BoB’s largest Maharashtra & Goa Zone as well as heading its largest overseas operations as the Chief Executive of UK operations for over 3 years.

The realistic banker that he is, Chairman Mundra correctly guided analysts during the Q3 results, that asset quality pressure would continue in Q4 and may be in Q1 of FY’14. The new CMD’s calculations were correct. One of the reasons of the jump in NPAs is due to the Bank’s proactive approach in treating the accounts as substandard even at the slightest sign of stress. 

But Mundra sees it as a one-off event due to a few reasons. Firstly, these NPAs didn’t come in from any large lumpy accounts. Secondly, the regulations are more stringent for international operations, as BoB has to adhere to both home country regulations and local regulations. So at the slightest sign of stress in the system, BoB tried to be proactive with declaring overseas NPAs.

What really happened is easy to explain. Nearly 70% of the bank’s overseas credit was to businesses related to Indian entities. And when the Indian situation became weaker and weaker, these overseas assets also started showing stress.

However, such operational pressures have not prevented Bank of Baroda from   generously rewarding its shareholders, by sharing from its still sizeable profits. The Bank’s Board has recommended a dividend of 215% or Rs. 21.50 a share for FY’13, which translates to a handsome yield of 3.30% at current prices.

Chairman SS Mundra has indicated that though the asset quality pains will continue for one or two quarters more, they are now shifting gears to be in growth mode again. There are reasons why Mundra’s assertion seems believable.

Around 70% of Bank of Baroda’s business is still domestic. And for the domestic NPAs, the gross NPA percentage has already come down on a quarter-on-quarter basis, even under these difficult economic situation prevailing in the country. What this means is that, if nothing unexpected happens, one can expect BoB’s NPAs to stabilize at the current levels during the first two quarters of this fiscal, and thereafter - from third quarter onward - the asset quality will start improving, leaving the bank free to pursue its growth trajectory, once again.

And when that happens, the market expects BoB to outperform its peers like in the past. More often than not, the bank has grown over 2% above the industry averages in both credit growth and deposit growth. CMD Mundra knows it will be a difficult challenge to repeat that great track record, but he has put in definitive plans to pursue that traditional outperformance model in these new times.

BoB’s new strategies revolve around an aggressive retail push that will eventually better the composition of the loan portfolio from a corporate dominated one to a retail dominated one. The bank’s recent offering of home loans at the base rate of 10.25% itself, irrespective of the ticket-size and tenure, is a step in this direction. Unlike similar offerings from its peers, BoB is even letting its existing customers migrate to this new interest regime with no extra cost. Focusing on home loans make immense sense for the bank, as its home loan portfolio is only 7% of its overall domestic portfolio, which means there is much room for improvement.

The bank’s international operations too will be strengthened. The new overseas strategy revolves around shunning geographical expansion to new unrepresented countries, but strengthening its presence in countries and regions where it is already doing well. Tanzania, for example, is all set to have five new BoB branches.

Such diverse strengths are the reason why most analysts feel that BoB stock might be the long-term outperformer among all public sector banking stocks. Even on its only weakness - asset quality - it is to be noted that it is the best performing PSU bank.

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