Bank of Baroda (BoB) is an Indian multinational, public sector banking and financial services company. It is owned by Government of India.

It has a very diversified business segments from lending operations to private equity and asset & wealth management.

Investment Rationale

Recently, public sector banks have been in news for high provisions, deteriorating asset quality and NPAs shooting through the roof which is weighing on their net profits.

On the account of strong growth and stronger future projections, most PSBs took higher exposures towards infra facing corporate resulting in restructures instead of NPAs recognition. As a result, banks are now facing capital deficiencies and are now unable to create new business due to inadequate capital.

Being a PSB, Bank of Baroda also fell into the same situation. Government has promised to save these ailing PSBs but capital infusion itself is not enough. If the lending practices do not improve then infused capital will again result in high provisions, deteriorating asset quality and NPAs shooting through the roof.

Bank of Baroda has made disclosures which shows consistent improvement in incremental disbursement of loans on all lending segments. There has been a dramatic improvement in asset quality in corporate banking, retail banking and MSME banking. The bank's total NBFC exposure rating is also above par post NBFC crisis of September 2018. Apart from this, the domestic and international NII and NIM are improving with international NIM catching up to domestic margins which might lead to better operating profits.

NII is showing a healthy growth but the provisions are weighing on the net profits, and moreover, the additional capital raising plans are short-term concerns that could hinder the growth of the bank. Before accessing the markets for capital the bank is going to fund growth from internal accruals and ESOP. Showing that business is well now the bank is going to tap markets for capital in Q3. Even if bank is not able to grow its operating profit the decrease in provisions will unlock greater value as presently the provisions for bad loans form around 86% of these provisions.

The bank's focus has now shifted to a bank target customer approach rather than customer target bank approach. The CASA deposit ratio is 41% and with the government's push for rural incomes and being a rural and semi-rural facing bank the CASA ratio could further improve improving the operating profitability of the bank.

The merger of BoB, Dena Bank and Vijaya Bank has attracted a lot of attention. Critics are of the view that the merger will decrease the profitability as a result of absorption of two weaker banks by one stronger one. The management declines such views. But even if this were true, the dedication and commitment of the management which can be seen in the disclosures increases the confidence of extracting value from this merger.

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source: Google

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