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Bank of Baroda Q3 hit by NPA, tax; Q4 to remain subdued

Bank of Baroda is under immense pressure post weak earnings. It’s net profit tumbled 62 percent due to one-time income tax payment of Rs 410 crore as well as worsening NPA levels. The ED of the bank assured the entire amount has been provided for in the books of account. CNBC-TV18’s Manasvi Ghelani spoke to Ranjan Dhawan, Executive Director of BoB attributed drop in profits to the above two reasons but warns that the current quarter is unlikely to see any revision since NPA levels are expected to remain elevated.

Below is the transcript of Ranjan Dhawan’s interview on CNBC-TV18.

Q:What is the reason behind drop in profits

A: The major drop in profits is due to one off charge for income tax from our Dubai territory of Rs 410 crore. So this has been a major hit.

To clarify to your viewers, what had happened was that in Dubai the taxation authority has reopened tax assessment which had been done but several years back, 2007 onwards. They had reopened the tax assessments and sort of came out with tax demand. So we had had said this is not tenable and had taken legal opinion on it. Then we went back on appeal to them. So after we went back, they disallowed it. We have already made a payment of Rs 210 crore and the balance is to be made in April, but we decided that since this demand is outstanding, we will take the hit this quarter. This is a one time hit, Rs 410 crore which will not occur in subsequent quarters. There is no further demand from any other place. So to that extent, I think the profitability next quarter will be substantially improved.

Q: What is the pending amount that is outstanding to the authorities?

A: Rs 165 crore, that has been provided for. The entire Rs 410 crore has been provided for in the books of account. Only the payment now has to be made in April. Otherwise the hit on the profitability has been taken in this quarter.

Q: Could you list down your provisions or at least help us run through that?

A: Our basic provision is for NPAs. Our NPA in this quarter has unfortunately deteriorated substantially. Normally our NPAs in a quarter are about Rs 2,000 crore odd. It could be Rs 2,200 crore one quarter or Rs 1,800 crore — around Rs 2,000 crore. This year it is almost Rs 3,100 crore. So the NPA provisions have substantially gone up and we have added about Rs 335 crore to NPA. So the second most important reason is the hit on the bottomline through the NPA provisions. So together, if it hit both of them together, something like Rs 750 crore is on account of these two provisions itsel. Because of this hit, the profitability this quarter has been very badly affected.

I know the next question logically is what happened this quarter, January-March quarter. My reply to that is we do see pressure in this quarter also. There would be no income tax hit but as far as NPAs are concerned, restructured book is concerned, there would be a pressure on this quarter. The sentiment in the market is very good, there is no doubt about it. Our clients are also reporting a lot of foreign money is flowing into the country, it is waiting for a suitable place to invest.

So going forward, I feel that FY15-FY16 should be much better. The IMF has made a projection of 6.5 percent  growth. So if there is a turning of the economic cycle then going forward I feel the next year should be very hopeful. But as of today, the demand remains extremely sluggish. You will observe that the loan book of the industry as a whole is growing at 10-11 percent that is exceptional. It is below the growth in money supply even. So one of the reasons this is happening of course is lack of animal spirit as the pricing power of our corporates is not there, they are not seeing that much demand from the market. A lot of our infrastructure, a lot of our housing for instance, one of the most buoyant sectors is housing. A lot of people who are doing retail housing, are reporting that they have unsold inventory. Therefore, the offtake at the moment is not that much. I don’t believe that this quarter will see any radical revision.

Q: Which are the sectors that are hurting you as far as your NPAs go and I believe there are two accounts that have cost stress, are they from the same sector and what is your forecast for the next couple of quarters?

A: I only mentioned that there is some lumpiness in our loan book. So if this quarter they turn the corner, they are currently NPAs, if they become performing then we may well have on March 31 a happier position than we have today. But the system is not okay. So in general, we are seeing four sectors which have a lot of stress one is infrastructure, iron and steel, in textile and chemicals. There are two-three others but these are the four other sectors where we see a lot of stress. I do not feel that any major event is going to happen this quarter, which will left these sectors out.

On the whole, I am very hopeful because one thing that was absent for a long time was the absence for animal spirit. So I am very clear that animal spirits have returned to the market and this is also clearly reflected in the various indexes. The BSE index, the NSE index are at all time highs and every month they are at all times. So I think there is always a lag between improvement in sentiment and investment.

Conversely there is a lag there also, sometimes sentiments changes gears very sharply but the effect on the balance sheet takes place after a year to a year-and-a-half. So there is an improvement in sentiment it has not translated into balance sheets as yet.

Q: Will there be a need for you to revise your NPA level targets that you are looking to achieve?

A: I am afraid so, yes. NPL level targets are likely to be a little worse. It has to be because if this quarter is bad and next quarter we see the NPA levels, then for this year would be higher.

Q: That would range in…?

A: 3.85 percent; we are still much better than the industry. We shall try to be less than 3.85 percent  but obviously we are committed to be very transparent. If customer cannot pay us, he cannot pay us. If he becomes NPA, we would like to reveal it. As a matter of principle we don’t hide NPAs. So since we are in a very fluid situation, I would not like to hazard a guess and also we are a listed bank, we would not like to give any figures out at all.

Q: Your yields on advances have seen some sort of pressure, it has been a marginal fall but there has been pressure, why is that and do you see that going forward as well?

A: Yield on advances — first of all because of all these high NPAs, there has been a reversal of income. Therefore there is a pressure on advances. Also pricing ability of the banks have decreased because the whole banking industry is afraid of high NPAs. So they are rushing to the better rated advances and consequently the better rated advances are able to command their prices. So we are seeing that for example, AAA or AA rated accounts, which were at one time able to command 11 percent. We have pushed them down to 10.5 percent, some of them even at base rate. So pricing pressure of the corporates has improved due to which yield on advances are coming down.


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