Bank of Baroda's Turnaround Story.

From merger chaos to operational efficiency

2 min readPublished
An editorial illustration of a sunlit Indian bicycle workshop with an organized pegboard and a restored bicycle, symbolizing a business turnaround.
How do you fix a giant bank?

Just like restoring a chaotic workshop, Bank of Baroda cleared the clutter to build a powerhouse.

The story

In 2019, Bank of Baroda merged with Dena and Vijaya banks, creating a behemoth in Indian banking. The initial chaos was palpable, but beneath the surface, a transformation was brewing.

Public sector banks often trade at a discount due to legacy bad loans and a slow-paced culture. Bank of Baroda was no exception.

The merger with Dena and Vijaya banks was a strategic move to scale up operations and improve efficiency. However, integrating systems, branches, and staff created initial chaos.

Post-merger, BoB focused on cleaning up bad loans and cutting costs to stabilize operations. The Gross NPA ratio fell from 14.6% in FY18 to ~4.4% in FY24.

As operational efficiency improved, the bank's ROCE showed significant improvement, a key signal of a PSU turnaround.

BAD LOANS (NPA) CLEANUP
4.4%
Down from 14.6% in FY18
Analogy

Efficient Operations Matter

Imagine two chai stalls: one with a fancy setup and the other a simple tapri. Both sell tea, but the tapri turns each rupee into more profit due to lower costs. Bank of Baroda's post-merger efficiency gains are akin to the tapri's operational efficiency.

Why this matters

Understanding turnarounds like Bank of Baroda's can help you make informed investment decisions. By recognizing the signs of operational efficiency, you can potentially benefit from long-term wealth creation.

Lock it in

Where people go wrong

  1. Buying PSUs just because they are cheapWithout checking if they've cleaned up bad loans, you're taking unnecessary risk.
  2. Expecting instant profit jumps post-mergerIntegration chaos is normal; patience is required.
  3. Confusing government backing with operational efficiencyGovernment support is crucial, but it's operational efficiency that drives long-term success.
If you only remember three things

  1. PSU banks can offer turnaround opportunities with proper cleanup and efficiency gains.

  2. Mergers create initial chaos but can lead to long-term operational efficiency.

  3. Patience and a focus on operational metrics are key to benefiting from turnarounds.

Investors often avoid turnarounds because the initial mess feels permanent, missing the slow compounding of operational efficiency.
Shekar
Amit
This merger looks like a total mess right now. I'm selling.