State-run Bank of Baroda reported a poor set of third quarter numbers. Its net profit stood at Rs 334 crore versus a CNBC-TV18 poll at Rs 1,243.6 crore.
Its NPA too rose 2.11 percent versus 1.74 percent quarter-on-quarter, while provisions stood at Rs 1,262 crore against Rs 888 crore Q-o-Q, and Rs 762 crore year-on-year.
Worsening asset quality is a worry indeed, but Jignesh Shial, research analyst, IDBI Capital Markets says what is more worrying is that these banks are not growing, putting pressure on margins as well.
Ofcourse with fresh slippages at Rs 3000 crore plus, provisioning in the next few quarters will continue to be high, he adds. Bank of Baroda’s restructured book is also a cause of concern, he says. But the advantage for the bank, according to him, is the fact that it always does extra provisioning. However, there will be book value shrinkages, says Shial.
Kajal Gandhi, AVP research of ICICI Direct says Bank of Baroda management too is not giving any clear guidance on provisioning, so changes are that in the coming quarters too it would continue to remain high.
On other public sector banks such as Punjab National Bank and State Bank of India, which are yet to declare their numbers, Shial says he would be more cautious on PNB than SBI.
Below is the verbatim transcript of Jignesh Shial and Kajal Gandhi's interview with Latha Venkatesh and Ekta Batra on CNBC-TV18.
Latha: What did you make of the numbers? do you think now you will have to downgrade price targets as well as your book value assumptions?
Shial: Definitely there is some setback but the immediate setback is on the growth side. So it is close to about 11 percent or 11.7 percent year-on-year (Y-o-Y). I am saying, last quarter also they grew close to 12-12.5 percent. This is a bit of a setback that is operationally we are worried about.
Secondly, that is what is pressurising on the margin front as well. Provisions anyhow is higher and we think it could be - as we were highlighting it earlier also slippage from the existing restructure book is also a cause of concern that is what has happened with OBC as well. So there is some hiccup.
Latha: What they have recognised is fresh slippages are up Rs 3,000 crore. Now this year they will only set aside 15 percent for provisioning, next year, they have to set aside 40 percent for this in terms of provisioning. So this provisioning increase is not stopping with this year, isn’t it, when fresh slippages are as high as Rs 3,000 crore in a single quarter, would you not be pencilling in lower profit for next year because these NPLs will mature?
Shial: That is true. That is how it is going to happen. Fresh slippages are a concern and that is also a kind of worry from existing restructured books. So the point I am trying to make is that you are not certain about any of the things.
Latha: What is the estimate or assumption you will make of book value because the reserves will go down if the profits are getting cut isn’t it, what are your current book value assumptions or reserves assumptions and what will it be for FY16 now?
Shial: Right now FY15 had been Rs 714 adjusted book. That is how I used to do it but definitely that is going to be a little shaky now. Even for BoB, the advantage is they do little extra provisions and there is some buffer provisions also left for them. So that is a little better for them but the rest of the PSU banks, the situation would be more worse because there is no buffer created and this is consistently rising. So it was absolutely right that there will be rising provisioning part and there will be book value shrinkages coming up for any of these banks.
Ekta: What is your first take on Bank of Baroda (BoB) and would you be reducing your earnings estimates now?
Gandhi: Yes, definitely earnings will have to get reduced. One item is extraordinary but otherwise also the provisions have gone up substantially higher in the single quarter, which is expected and the management is not giving any clear guidance, it is expected to continue. So definitely, earnings will have to go down by at least 30 percent for this year at least that is what we can see, both the quarters are expected to see strong provisions.
Latha: Do you cover Bank of India because that stock has lost 6.5 percent and all the 6.5 percent has come in the last half hour? Are you lowering your price targets or your book value targets for all of these?
Gandhi: Definitely for Bank of Baroda since the numbers are out, it is going to be a dip in the earnings and accordingly the book value and accordingly also multiples will have to be slightly reduced because till now the Baroda was getting for its asset quality and its strength for standing in this environment may slightly go down. So accordingly, we can see some adjustment in BoB multiples also and if PNB gives better results in this environment which maybe difficult but then PNB may see some more light in the day compared to Baroda possibly.
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