Bull Vs Bear: Bank of Baroda's NPLs a worry for investors

In CNCB-TV18's special segment 'Bull vs Bear', stock experts — Nitin Kumar of Prabhudas Liladher and Siddharth Purohit of Angel Broking — talk about their future outlook on Bank of Baroda. While FY17 will not be great for banking sector as a whole, Bank of Baroda's non-performing loans (NPL) will not come down significantly, said Nitin Kumar of Prabhudas Liladher. Backing Kumar, Siddharth Purohit of Angel Broking said with a neutral rating on the stock, advises investors to avoid buying at the current level. However, if the economy picks up, the bank may be able to perform well and could recover loans significantly. Furthermore, he is positive on the bank as the management is investing a lot in technology to improve functioning.Below is the verbatim transcript of Nitin Kumar and Siddharth Purohit’s interview with CNBC-TV18's Nigel D'Souza and Ekta Batra..Ekta: It is not only you that have a sell call but there have been a couple of downgrades such a Kotak also which has come through today. Your sense in terms of how tough the asset quality picture is going to get for Bank of Baroda?Kumar: The hopes that got raised after the management in last results presented that all the pain has been taken in this quarter itself and there is nothing pending in terms of asset quality review (AQR). After that the street view was that we will see some respite in gross non-performing loans (NPL) and likely we will see a decline but this quarter and all the slippages number has been pretty high and next year itself the management is talking about Rs 15,000 crore of NPL formation and Rs 5,000 crore of likely net addition to the NPL. So, this then implies that your gross NPL which is right now at closer to 10 percent will not come down in a hurry. So, it is going to take time and the watch list they have disclosed, it could have some implications for other public sector undertaking (PSU) banks also. So, maybe for the entire PSU banks FY17 also will not be as good as year as to what was earlier envisaged.Nigel: You believe that this dip will be a buying opportunity and do you believe that in fact in the next couple of years we could see a total turnaround of sorts?Purohit: Certainly we are not a buyer at this level also. As I agree with Nitin to some extent that post Q3 we had a hope that there is a revival in the bank as far as asset quality is concerned but certainly this quarter has come as a very negative outcome both on the asset quality front and even the guidance front. Like the total Rs 26,000 crore worth of loan that is under watch it is fair to assume that close to 50-60 percent of that should fall into non-performing asset (NPA) over next one or so. So, the provisioning numbers are certainly going to be on a higher side for FY17.The one part that what the management is banking on is that the higher recoveries in upgradation that they saw in Q4. So, they are banking high on the upgradation in recovery. And going by the current rate it doesn't really look like that run rate of Rs 3,200 crore what they achieved in Q4 would be sustained on a continuing basis for the next four quarters. So, as far as absolute number of gross NPA is concerned I don't see that coming down in FY17. Probably there will be some amount of respite in FY18 but FY17 could be another washout year.Even if the best case scenario they deliver say eight percent kind of return on equity (RoE) in FY18 then also the current valuation doesn't really leave much for the stock for upside. So, we will certainly not buy at this level in the stock.Ekta: But you have a neutral call on the stock. So, what is the positive upside that you see then?Purohit: The neutral rating is because of one reason that they are little better off as far as capital adequacy is concerned compared to other PSUs. If you see their Tier I is somewhere close to 10.8 percent. So, that gives them enough leeway for kind of a growth in FY18 if economy picks up. So, that is one area of positive for them.Another good point     is that the management is now investing a lot on the technology front. They are also trying for more client mining in the form of transaction banking and so. So, possibly now the management is trying to transform themselves and try to differentiate from other set of PSUs. So, FY18 could see a lot of revival but it is very early to say. So, kind of we have a benefit of doubt that FY18 should see revival and that is why we have a neutral rating for the time being.