Agri loans default / waiver have long term impact on banking sector: The recent spate of demands for farm loan waivers are a long term negative for the Indian banking sector as it increases moral hazard risk in the agriculture loan segment (nearly 14% of total advances). As per estimates, in some states the default rate has increased by up to 50 per cent in recent months. In this scenario, Bank of Baroda would also likely be impacted by Agri-loan defaults, which will be a drag on its profitability.
Bank merger is an overhang as a weak bank saddling with BOB may impede margins, CRAR: The government is working towards overhaul of the PSB space and consolidation amongst PSBs is also a likely measure. Bank of Baroda is relatively better placed in terms of asset quality and capital adequacy as compared to some of likely candidates for consolidation. Hence, a merger of BOB with a significantly weaker player (if announced) notwithstanding the likely synergy benefits (to accrue over a longer period), in the near term, it may be performance dilutive for BOB.
NPA resolution steps – may entail near term earnings impact due to higher provisions: RBI’s decision to expedite 12 cases of corporate loan defaults and enforce speedy resolution is a long term positive and a welcome step. However, in the near term, lenders may have to take significant haircuts in the process of selling off or other measures implementation to resolve the NPLs. Hence, in the near term, it may weigh upon on banks’ profit performance.
Outlook: BoB’s performance in Q4FY2017 were a mixed bag with absence of a significant negative surprise on asset quality front (despite a slow pick-up in business) being the key positive. However, in the event of a merger with a weak bank, or increased provisions for NPA resolutions may impact margins and return ratios going forward. While we are positive on the business strengths of BOB, we believe that in the near term, the above mentioned events are likely to weigh down on the stock performance.