Thursday, April 7, 2016

How Bank of Baroda's Business Transformation is Performing

After becoming one of the first Indian PSU banks to set the MCLR system, there is no doubt left that India’s second largest PSU lender  by assets, Bank of Baroda (BoB), is not just improving but transforming itself. Headed since the past five months by a private sector banking veteran, Bank of Baroda is rebalancing its corporate loan portfolio, building sectoral intelligences, centralizing corporate services, cutting risk-weighted assets, improving retail services, and planning to monetize non-core assets. Under former Citibank veteran PS Jayakumar’s leadership, the Mumbai based lender is literally a new bank in the making.

Bank of Baroda is again in focus after it became one of the first public sector banks to implement Marginal Cost Lending Rate (MCLR) System, which lowers the lending rates for customers, and it got added significance after RBI Governor Dr. Raghuram Rajan made it clear in the latest policy review that RBI is now going to focus more on such rate transmission mechanisms.

Bank of Baroda stock has bounced up almost 40% from its yearly low. And it took far less than a year to achieve this. Just nineteen days to be precise! What is more, BoB’s 52-Week High is just another 42% away. While no one expects the further movement to be as swift, no one is daring to bet that it would take a year more for breaking the yearly high. What miracle is happening at the Mumbai based lender?

But before that, it pays to put this quick turnaround in sentiment at the BoB counter in its full perspective. It is unnecessary to repeat that public sector lenders like Bank of Baroda have been going through their worst time ever, due to the NPA crisis. But what needs to be stressed is that this turnaround in investor confidence comes on the heels of one of the worst ever quarterly losses by any public sector lender recorded by BoB during the recent Q3. What is at play here?

The story begins five months back. After many stalwarts from the public sector banking industry couldn’t make a dramatic improvement in the fortunes of PSBs, largely due to the NPA crisis, their majority owner Government of India started appointing experts from private sector banking to the posts of Chairman and MD/CEO. As fortune would have it, Bank of Baroda was one of the first of these experiments.

On October 13th 2015, former Citibank veteran PS Jayakumar took over as MD & CEO of Bank of Baroda, while former Chairman of Microsoft India, Ravi Venkatesan assumed office as its Non-Executive Chairman.

A Chartered Accountant by training, PS Jayakumar also holds a PGDBM from XLRI, and was with Citigroup for 23 years in Singapore and India. Brilliant in both his academics and career, he also holds the distinction of being a Chevening Gurukul Scholar through the London School of Economics and Political Science.

After leaving Citibank, Jayakumar co-founded Home First Finance Company, and later VBHC Housing where he was CEO. Both the companies were focused on the fast growing domain of affordable home loans for the middle or low incomes groups and the financially excluded segments of the society.

The new MD & CEO rapidly went to work at Bank of Baroda, but the transformation he was attempting was largely hidden from the external world. Unsurprisingly, the stock of Bank of Baroda continued its downward trajectory during those initial months, in sync with its peers.

Then came the chance that a no-nonsense leader like Jayakumar - who learned banking in the performance-oriented private sector - was looking for. It came in the form of Dr. Raghuram Rajan’s demand for an Asset Quality Review (AQR) at all PSBs. The move by RBI was to preempt shocks to the banking system by predicting future NPAs.

For example if Client A was a defaulter to Bank 1 but not Bank 2, RBI directed Bank 2 also to consider it as an NPA and make provisions for it. There were other strategies too in RBI’s AQR which literally forced banks to come out in the open with their real NPA status. And RBI gave ample time – two quarters – to come clean.

This is where Managing Director Jayakumar and his senior team led by Executive Directors Bhuwanchandra B Joshi and Mayank K Mehta, saw their chance to transform the bank more rapidly than anyone had anticipated.

They complied with all AQR norms in one quarter itself, which while ballooning the losses to Rs. 3342 crore in Q3, clearly conveyed to the market that there were no more NPAs with at least one public sector bank – Bank of Baroda.

However, that alone was not reason enough for the swift turnaround in investor sentiment with regard to BoB. For the first time, PS Jayakumar and his senior team came out in the open and clarified the numerous doubts that were in the minds of analysts and investors alike.

While all their replies were rooted very much in the reality of NPAs and the resultant banking sector woes, some of their replies to the vexing questions revealed a bank that was not planning to turnaround if the economy improves, but a bank that was already turning around despite the tough situation around, through tougher means.

The most emphatic of Jayakumar’s clarifications was that despite generating this one-off loss of Rs. 3342 crore, the bank was well-capitalized at least for the next couple of years and that it won’t be troubling its promoter, GoI for more funds. That the bank was that confident of meeting its capital requirements through business income was a pleasant surprise for the market, as almost every other PSB was already at government’s doorsteps for more equity infusion.

Moreover, this promise was backed up by intricate details about how BoB was planning to achieve this feat.

For one, Jayakumar is rapidly rebalancing the bank’s portfolio of loans. Deep engagement or warm relationship is the new mantra while choosing to keep or forsake a corporate loan customer. BoB has also made it a point to not participate in any loan syndication opportunities that are floating around, just because they are available.

Under Jayakumar’s direction, the bank has also strengthened a specialized wing called BoB Caps that develops sectoral intelligences in various industry verticals so that there is not only better screening and better risk management but better conviction in the business whenever a credit is extended.

Another innovation has been centralization of corporate services in 15 major branches which are fully equipped to handle any complex requirements with better risk management, while the rest of the branches will utilize the resultant easing of pressure to better handle retail customers thereby improving quality metrics like turnaround time in consumer loans.

Coming from the private sector banking industry, this new CEO is also sharply focused on capital efficiency. While BoB, like most PSBs, has a high level of risk-weighted assets, Jayakumar is bringing in greater efficiency by cutting such participation and redirecting the funds to customers who need it, thereby resulting in better spreads too.

BoB is also unblocking credit lines to numerous customers that are not utilizing the facility fully, and focusing more on sectors where the bank is under-represented like financials, real estate, and logistics, as well as in sunshine sectors like e-commerce.

Traditionally known for its international operations too, BoB is also taking a hard look at its worldwide operations to see whether which country operations should be scaled down or exited, and which country operations should be scaled up.

The bank also has a one-year plan to monetize many of its non-core assets like stakes in stock exchanges, credit rating agencies, asset reconstruction companies, and UTI.

Even with all these measures in place, Jayakumar doesn’t expect it to be a smooth ride, and has already chalked out alternate plans if the economy takes more time than anticipated to turn around. In fact, he is candid enough to admit that his greatest learning since assuming this office is that the turnaround in public sector banking is directly linked to the economy’s turnaround.

That is why the market takes the Managing Director and CEO of Bank of Baroda seriously. A turnaround in a leading PSB like BoB is sure to unlock huge profits as the large provisions get reversed.

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