Financial Report 2017-18

P S JayakumarManaging Director and CEO

Dear Stakeholder

It is with a great pleasure that I present before you the highlights of Bank’s performance during the financial year 2017-18. Details of the achievements and initiatives taken are provided in the Annual Report.

Macro-Economic Overview

Global economic recovery gathered momentum with a broad based growth in 2017. Indian economic fundamentals continued to improve. FY 2018 has been eventful for the Indian economy with number of structural measures initiated by the Government leading to growth in formal economy and an environment for long term growth. The implementation of GST, the biggest taxation reform in post-independent India romotes productivity by removing barriers to inter-state trade and will lead to benefits to the economy in the long run. GST, Aadhar, targeted delivery of benefits through the Direct Benefit Transfer (DBT) and digitization thrust are leading towards further formalization of the economy.

On the banking scenario, major step taken by the Government was recapitalizing the public sector banks with an infusion plan of ₹ 2.11 lakh crore which should help address the issue of non-performing loans (NPLs) and ease the lending constraints thereby contributing to growth. The year saw implementation of Insolvency and Bankruptcy Code (IBC) enacted during previous year. This has made the resolution of stressed assets possible within defined time frame and has changed the paradigm of NPL resolution mechanism for the banks. Though the NPLs of the banking system increased in quarter ended in March 2018 impacting the profitability in near term after RBI revised the framework for resolution of stressed assets dismantling earlier mechanisms to deal stress, this marks the final stage of multi-year initiatives of RBI to recognize problem assets more accurately. Going forward, cleaner and recapitalized balance sheets should help banks to move forward. With this step, RBI is also preparing the banking system for implementation of Ind-AS from the next financial year.

Given the background of the structural reforms, India recorded a 30 place jump in ranking on ease of doing business published in the World Bank’s report 2018. India is one of the top five reformers improving its score in six out of ten parameters for measuring the ease of doing business. Considering the size of our country, this progress has been significant. Moody’s raised the sovereign rating of the country which was the first upgrade in 14 years. As Moody’s said in its statement, continued progress on economic and institutional reforms will, over time, enhance India’s high growth potential.

Recent economic indicators point to an improvement in domestic economy. The slowdown appears to have bottomed out led by growth in manufacturing sector. With exports expected to pick up on the back of improvement in global economy, Indian macro-economic environment is promising. There is expectation of reversal in capex cycle and pick up in credit demand could be observed in banking industry after a long gap. With the asset quality cycle expected to play out, outlook for FY 2019 appears to be encouraging.

Bank’s Transformation Journey- Project Navoday

In my statement last year, I had mentioned about our transformation journey ‘Project Navoday’ and alignment of business initiatives with transformation, core of which is centered around processes, products, platforms and people’s capability building to gain the competitive advantage.

I am pleased to report that during the year a number of such initiatives have been executed/are in advanced stage of execution. They have started reflecting in our business numbers and the quality of business accrued. Some of the initiatives executed are:

• For growth of our corporate banking portfolio, we have adopted target market approach with clearly defined target markets. Target account plans have been put in place at major centers executed through relationship managers (RMs). To ensure consistency in underwriting, separate corporate credit approval function with a team of sector specialists is also in place. For faster turn- around time, the number of layers for approval have been reduced to one for Corporate Financial Service branches. The benefit of the approach is visible in increase in investment grade clients in our portfolio from earlier levels.
• Strengthening our product proposition, we launched fully digitized and integrated supply chain financing and cash management programme. These products now act as feeder for new client acquisition including in MSME segment and for growth of low cost current account deposits. A digital platform viz. Baroda INSTA for our trade finance customers is under deployment and has been launched for -2- trade finance products. It is being extended for others. All these products have been well received.
• For our retail customers, we have simplified the retail loan approval process; introduced risk based pricing; expanded distribution channels for sourcing; centralized the mortgage loan processing for consistency in underwriting and commissioned a dedicated retail loan collection center for timely collections. Risk profile of portfolio as well as proportion of retail book to total loan book has improved. The building blocks for sustained retail loan growth have been put in place.
• We have digitized the processing of loans and their approval for our retail customers; for others, it is in the final stages of deployment.
• Strengthening our proposition to support MSMEs customers, we simplified loan approval process on the basis cash flows for lending to MSMEs on emerging digital channels. Bank was first to onboard all three TReDS platforms and is accounting for 22% of the business on it as on March 18. We commenced financing sellers on e-commerce platforms and launched a special product for financing against GST receivables. For agriculture financing, we adopted alliance led strategy of eco system financing to support innovation and entrepreneurship thereby helping farmers augment their income.
• Strengthening the business origination process for our depositors, we digitized the account opening process making it paperless through Tablets. It offers seamless user experience and reduced turn-around time (TAT) of few minutes. All branches pan India have been enabled for this. Besides other digital platforms have been revamped including the mobile banking app to incorporate best in class features, credit cards and debit cards.
• During the year, we commenced services for financial planning and wealth management for our customers. Segmented offerings to various set of customers include enhanced banking services and service levels, preferential pricing and wealth management services with dedicated relationship managers and investment counselors. To start with, these services are offered at two cities for to be expanded progressively.
• As a green initiative and towards a major step leading to paperless banking, we have undertaken digitization of records across the Bank with over 600 branches already completed and implementation for remaining proceeding as per plan. This helps branches to retrieve, save, print and e-mail digitized records of customers anytime and anywhere besides unlocking the space at branches.
• Bank’s operating architecture was revamped by setting up a state-of-the-art Shared Service Centre at GIFT City, Gandhinagar, Gujarat. A number of back office operational activities of branch like account management services, mortgage loan processing, forex and trade finance operations have been migrated enabling release of sales time for the branches. It has also ensured improved risk management, controls and compliance besides improving efficiency and lowering the costs.
• Strengthening the technology capabilities of the Bank, we upgraded our core banking system (CBS) to its latest and upgraded version followed by its integration to various digital applications which work seamlessly across multiple channels viz. smart phones, tablets, laptops, etc. We have also set up an IT Center of Excellence (ITCoE) to add further power to our technological capabilities and are setting up an Analytics Center of Excellence (ACoE) which would analyze data and provide insights of our customers.
• Forging over 20+ fintech alliances/partnerships to take advantages of innovation and to meet emerging business requirements. We platformised with select ones by opening up the APIs to connect and offer differentiated products and services such as digital lending.
• In view of advancements in technology and growing transactional data we have undertaken transformation of audit process, supplementing the on-site audit process with off-site one leading to timely preventive actions, improved controls and cost efficiencies. Fragmented concurrent audit process was streamlined for an integrated view of operations.
• People’s transformation and capacity building through multiple HR interventions was undertaken such as launch of a comprehensive leadership programme – “WeLead” for all cadre of officers; introduction of a digital Performance Management System (PMS) christened as Baroda GEMS (Growth & Empowerment Management System); roll out of employee engagement initiatives under ‘Baroda Anubhuti’; launch of a new employee grievance redressal portal etc. all aimed at increasing capacity building, employee motivation and engagement.

Given the strategic initiatives undertaken during last two years and moving on course to take them to logical conclusion, the Bank is well positioned to capitalise on the opportunities arising in the emerging banking and economic scenario.

Financial Performance

A snap shot of the Bank’s performance during FY 2018 is as under:

Deposits

Accretion to global CASA deposits during the year was ₹ 18,283 crore while domestic CASA deposits increased by ₹ 18,729 crore registering a growth of 9.45% and 10.79% respectively. Percentage of domestic CASA deposits increased to 41.18% from 39.44% last year. For a sustained growth of these deposits, we have taken number of steps by increasing our product and process proposition by launch of new products like cash management, wealth management suite for differentiated segment of customers and digitizing the processes like opening of accounts through tablets, revamping of mobile banking app, launch of m-passbook, launch of mobile app for wealth management, strengthening our e-payments products (RTGS,IMPS,UPI), tie-up with multiple payment aggregators, introducing differentiated debit cards, rebranding our credit cards etc. Total domestic deposits during the year grew at a lower rate of 6.11% in the back drop of surplus liquidity with the Bank.

Credit

With the execution of transformation initiatives taking shape, Bank continued its journey on growth path. Domestic loan growth was 17% during FY 2018, over six percentage point higher than banking system non-food credit growth. It was driven by retail loan growth of 42% and corporate loan growth of 16%. Expansion of retail loan book was led by home loan growth of 48%. The share of retail loans to loan book increased from 19.5% as on March 31, 2017 to 23.5% as on March 31, 2018. Bank has put in place the building blocks for sustained retail and corporate loan growth.

Bank is committed to play meaningful role in supporting Government objective of lending to priority sectors led by MSME and agriculture. While MSME loans grew to ₹ 51,730 crore as on March 31, 2018 from level of ₹ 48,545 crore last year, agriculture loan book was ₹ 49,583 crore as on March 31, 2018 as against ₹ 47,297 crore last year.

International Business

As a part conscious strategy pursued, the contribution of international business to our total business reduced from 31.30% as on March 31, 2016 to 27.14% as on March 31, 2017 and to 22.33% as on March 31, 2018. Deposits in FY 2018 degrew by ₹ 37,242 crore which reduced the placement assets by ₹ 34,011 crore. The loan book also declined by 2.4%. The net interest margin (NIM) of the international business improved from 0.88% in FY 16 to 1.05% in FY 17 and to 1.10% in FY18.

Asset Quality

During the year, the banking sector continued to have overhang of stressed assets. The Insolvency and Bankruptcy Code (IBC) become operative. The regulator empowered by law, mandated banks to arrive at resolution of some of the large value NPLs covering a significant part of NPLs of the banking system under IBC mechanism at National Company Law Tribunal (NCLT). NPLs of the banking system further increased in the quarter ended March 2018 after RBI revised the framework for resolution of stressed assets repealing earlier schemes like SDR, S4A, 5/25, CDR etc. and aligning them with IBC.

In the above backdrop, gross non-performing assets (GNPAs) of the Bank increased from ₹ 42,719 crore as on March 31, 2017 to ₹ 56,480 crore as on March 31, 2018. The GNPA and Net NPA ratios were at 12.26% and 5.49% respectively.

Recoveries and upgrades during the year were ₹ 5,443 crore. Recoveries from technically written off accounts were higher at ₹ 621 crore compared to ₹ 327 crore last year. It is worth mentioning that the total stressed book of the Bank has broadly remained stable with migrations from one category to other.

Following the prudent approach, Bank continues to have high provision coverage against these assets which provide strength to your Bank’s balance sheet. Provision Coverage Ratio (PCR) including technical write offs (TWO) as of March 31, 2018 increased to 67.21% from 66.83% as of March 31, 2017. PCR without TWO stood at 58.42% as of March 31,2018 as against 57.68% at the end of last year. These ratios are highest amongst the public sector banks.

With final stage of recognition being over after revised guidelines of RBI; resolution of large NPL accounts at NCLT expected to materialize during the FY 2019 and with a higher provision coverage, it should help Bank to move forward leaving behind the legacy of asset quality issues.

Operating Performance

Operating performance of the Bank further improved in FY2018. Operating profit increased by 9.39% to ₹ 12,006 crore in FY 2018 against ₹ 10,975 crore in FY 2017 led by growth in both the interest income and fee income. The core income of the Bank viz. the net interest income (NII) grew by 14.87% to ₹ 15,522 crore driven by growth in interest income on advances by 5.62% on the back of healthy credit growth and a prudent liability management leading to reduction in interest on deposits by 2.90%. Total non-interest income was lower at ₹ 6,657 crore against last year’s level of ₹ 6,758 crore, impacted by 28.27% lower treasury gains due to hardening of bond yields during second half of the year. Though RBI allowed banks to stagger mark-to-market bond portfolio losses over four quarters, your Bank did not have any MTM losses on G-secs during the year. Core fee income increased by 14%. Global NIM improved to 2.43% in FY 2018 from 2.19% in FY 2017. NIM for domestic operations also increased to 2.88% from 2.64% last year.

The operating expenses during the year increased by 9.43%; the main increase being in depreciation on revalued fixed assets. However, cost-to-income ratio remained steady at 45.87%.

During the year, your Bank provided ₹ 14,212 crore towards NPAs on a larger pool as against ₹ 7,680 crore in FY2017. As a result, Bank posted net loss of ₹ 2,432 crore as compared to a net profit of ₹ 1,383 crore in 2016-17.

Capital

The capital adequacy ratio of the Bank at 12.13% as of March 31, 2018 continues to be above regulatory requirements. It was strengthened by addition of ₹ 5,375 crore as equity by GOI and raising of ₹ 1,350 crore through issuance of Additional Tier-1 bonds. The Tier-1 capital was 10.46% and Common Equity Tier-1 (CET-1) was 9.23%. The consolidated group capital adequacy ratio was higher at 12.87%.

Along with recapitalization of PSBs, a reforms agenda with definitive action points has been laid down by the GOI. With number of transformation steps accomplished as detailed earlier which includes most action points under the reforms agenda, your Bank is well placed to deliver quality growth on the back of strong franchise it enjoys with the customers and other stakeholders.

The Way Forward

Recent economic indicators clearly point towards a steady upturn in the economy. The credit growth in the system is improving. The investment activity as measured by gross fixed capital formation is increasing to double digits. Bank is well positioned to take advantage of the improving macroeconomic environment. With satisfactory capital position and expected improvement in stress in the loan book, we will march on our chosen path of quality and profitable business growth with clear focus on execution of remaining part of our comprehensive transformation programme. Enhancing the customer and employee satisfaction will continue to be our priority.

I would like to acknowledge and thank the Chairman of the Board Mr. Ravi Venkatesan and all the members of the Board for their valuable support, guidance and inputs to the Management in all the endeavours. I would also like to acknowledge and thank all our employees for their hard work, dedication and commitment. We look forward to your continued patronage, support and goodwill.

P S Jayakumar
Managing Director and CEO