BofA-ML cuts Bank of Baroda, Union Bank of India

Bank of America Merrill Lynch downgraded public sector lenders Bank of Baroda and Union Bank of India on slowing growth and impact on earnings from mark-to-market losses in their bond portfolios.

Bank of Baroda shares were trading 5.00 per cent lower while United Bank of India shares were down 4.36 per cent as of 13:45 p.m.

Bond yields surged sharply after the central bank began tightening short-term liquidity last month in order to arrest the rupee decline.

State-controlled banks typically hold large portfolios of government securities in the available-for-sale (AFS) category rather than in the held-to-maturity (HTM) category, which means a drop in bond yields has to be recorded as a capital loss on their balance sheets.

The brokerage says it expects MTM losses of at least Rs 300-400 crore for Bank of Baroda, estimating that the lender has an AFS book of 21 per cent of its bond portfolio.

It cuts the bank's rating to 'neutral' from 'buy'.

It values United Bank of India's AFS book at 17 per cent of its bond portfolio, re-rating the stock to 'underperform' from 'neutral'.

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