Bank of Baroda’s (BoB) first quarter financial performance reinforces analysts view that its merger with Dena Bank, and Vijaya Bank will not only take time to consummate, but will also incur huge integration and transition costs.
For instance, Edelweiss Securities estimated that the bank will incur as much as Rs 5,400 crore towards integration, but the first quarter already saw that expense in excess of Rs 6,000 crore.“We had anticipated large transition cost of about Rs 5,400 crore comprising higher credit, people and integration of IT and processes expenses.
Our estimate was overshot in Q1 FY20 with about Rs 6,000 crore hit already taken. We believe, some costs such as IT and integration are still pending, which will keep earnings muted. Moreover, there will be softer challenges of processes, branch rationalisation and management continuity, which dim earnings possibility,” it pointed out.
The first quarter also saw higher slippages with Infrastructure Leasing & Financial Services (IL&FS) account emerging as the largest borrower that slipped during the quarter. According to BoB MD & CEO PS Jayakumar, though the slippages ratio remained consistent with that of the industry average, recoveries were lower than desired. He, however, hoped that the current quarter will see higher recoveries, bumping up the bank’s total income.
According to brokerages, slippages, which stood at Rs 6,600 crore, entailed three critical elements. One, Dena and Vijaya Bank slippages continued to soar at 7.8 per cent and 4.4 per cent respectively. Two, slippages were granular, only sub-25 per cent from corporate, which will likely to continue and three the watchlist (at 2.5 per cent of advances) comprise stressed sectors and possibly will lead to higher haircuts. “These, we believe, will keep slippages higher and credit cost elevated, despite 64 per cent of provision coverage ratio,” Edelweiss observed.
Gross non-performing asset (NPAs), though remained steady sequentially for the merged entity, over 30 per cent of the corporate book is rated BBB and below and 2.5 per cent of the advances in watchlist primarily comprising troubled accounts such as DHFL, ADAG, Syntax and others. This, along with the challenge on granular slippages reflected in the first quarter, will likely keep slippages higher and credit costs elevated despite have a provision cover go over 64 per cent.
“We believe, BoB’s post-merger operating metrics will be modest in the near to medium term with sub-optimal return ratios,” Edelweiss Securities noted.
Slippages entail critical elements
Slippages, which stood at Rs 6,600 crore, entailed critical factors such as slippages of Dena and Vijaya banks, which continued to soar at 7.8 per cent and 4.4 per cent respectively. Slippages were granular,
only sub-25 per cent from corporate, which will continue