Bank of Baroda stress disclosure is a warning sign amid bullish calls to banks
Bank stocks have rallied in recent months, which analysts say is an early indicator of the economy’s expected cyclical recovery. But the disclosure of the stressed assets of the second-largest public-sector bank is a stark reminder that Indian lenders have not healed from the pandemic.
The rally may just gloss over bad debt holes in banks’ balance sheets. In its Qualified Institutional Placement Document (QIP), Baroda Bank reported that its Special Mention Account (SMA) stack jumped to 21% in the December quarter, down from just 8% in the fourth quarter of fiscal 20. This is in addition to the gross bad debts that the lender had reported and understood the full impact of the pandemic on the bank’s loan portfolio.
Analysts at Kotak Institutional Equities point out that data disclosure has been asymmetric between banks with large differences. Asset quality indicators such as gross bad debt ratios have been distorted by judicial and regulatory abstention. Certainly, the banks have detailed their bad debts excluding the impact of judicial abstention. Even so, the real stress in the wake of the pandemic is still unclear. “The lack of data on the situation on the ground made understanding the recovery quite difficult,” the Kotak report said. “In our opinion, given the challenges on the ground and the lack of credible information on the stressful situation in all loan portfolios, it would be helpful if lenders gave the SMA 0/1/2 as well as 90+. DPD (late days) which have not yet been recognized. “
Indeed, the banks have detailed their gross bad debt ratio outside the status quo on the recognition of bad debts imposed by the Supreme Court. But the first signs of stress are captured by SMA and these are not detailed by most banks. SMA captures loans in default after one day and displays defaults for up to 90 days, after which the account is declared overdue.
For Bank of Baroda, the increase in SMA numbers indicates that the stress is much higher than the numbers show. Loans 60-90 days overdue represented 5.5% of the loan portfolio. Adding all SMA loans to the gross bad debt pile shows that Bank of Baroda’s stressed assets make up almost a third of its loan portfolio. Nomura Financial Advisory and Securities India Ltd downgraded the bank’s rating to neutral after this data point. The bank launched its QIP through which it aims to raise ??4,500 crores.
Nomura analysts said the issuance would result in an 11% dilution of the shares and a dilution of the book value per share of 5%. The shares are currently trading below their estimated book value for fiscal year 22.
Never miss a story! Stay connected and informed with Mint. Download our app now !!