When will banks see acche din?


India’s benchmark equity indices reached record highs last week as foreign institutional investors poured in money in emerging markets in the wake of Japan’s unexpected fall into recession in the third quarter and sluggish economic growth in the euro zone. Particularly, bank stocks have been rising as a dramatic fall in inflation is encouraging a large segment of the market to bet on an interest rate cut by India’s central bank sooner than later. If indeed that happens, tardy growth in loan portfolio will get a boost even as banks will make money with the drop in bond yields.

While we will wait and watch what the Reserve Bank of India (RBI) does on 2 December at its bimonthly review of monetary policy, the September quarter earnings of listed Indian banks do not tell a great story. The highlight of the earnings is the drop in bad loans of the nation’s largest lender—State Bank of India (SBI)—to 4.89% of its advances from 5.64% a year ago, but the overall health of the banking system, particularly of public sector banks which have a 70% market share in assets, is something that we don’t feel excited about.

The quality of assets continues to remain a concern. The collective gross non-performing assets (NPAs) of 40 listed banks rose in the September quarter to Rs.2.69 trillion, 17.5% higher than September 2013. Only eight banks have been able to bring down their gross NPAs in absolute term, including SBI. Its gross NPAs dropped to Rs.60,712 crore from Rs.64,206 crore a year ago. After setting aside money to cover bad loans, this group of banks’ net NPAs have risen 19.5%—from Rs.1.28 trillion in September 2013 to Rs.1.53 trillion now. Here too, only six banks have been able to pare their net NPAs in absolute terms.

At least one bank—Kolkata-based United Bank of India—has more than 10% gross NPAs (10.78%) while 11 of them have at least 5% NPAs. Of these, Indian Overseas Bank (IOB) has the highest gross NPAs in percentage terms (7.35%) and State Bank of Mysore the lowest (5.07%). Other banks in this group are Dena Bank, Dhanlaxmi Bank Ltd, State Bank of Travancore, Punjab and Sind Bank, Andhra Bank, IDBI Bank Ltd, Punjab National Bank (PNB), Allahabad Bank and Central Bank of India. Eight banks have gross NPAs of 4% or more. They are SBI and its associate State Bank of Bikaner and Jaipur, Jammu and Kashmir Bank Ltd, Bank of Maharashtra (BoM), Corporation Bank, Union Bank of India, Oriental Bank of Commerce and India Bank. Overall, only 15 of the 40 banks have been able to bring down their gross NPAs as a percentage of advances in September compared with September 2013. If we compare the figures with the June quarter, then only 10 banks have been able to shrink their bad assets.

Given this, it is surprising that only 18 banks in this pack have set aside more money to bring down their net NPAs. Overall, provisions made by these banks have actually shrunk by 0.27%. PNB, BoM, Corporation Bank, United Bank of India and Central Bank of India, among others, have provided less in the September quarter to show higher profit despite a rise in bad assets. As a result, overall net profit of these banks have risen 27% to Rs.17,843 crore. Fourteen out of the 40 listed banks have shown less profit in the September quarter compared with the year ago period. Compared with the June quarter, 23 banks have shown less profits. Collectively, their net profit dropped close to 14% compared with the June quarter. The scene would have been far worse had some of the banks set aside more money to take care of their rising bad assets.

Finally, let’s take a look at their net NPAs. United Bank of India topped the list with 7.19% net NPAs, followed by IOB (5.17%) and Dhanlaxmi Bank (4.6%). Nine banks have their net NPAs more than 3% but less than 4%, and eight have less than 1% net NPAs. Only 10 banks have been able to bring down the net NPAs as a percentage of loans in the September quarter compared with the June quarter as well as September 2013 quarter. Overall, most private banks, particularly those born in 1994 or later, are better off than their counterparts in the public sector.

Both NPAs as well as restructured assets have been on the rise. Many banks are on an overdrive to restructure stressed loans to take advantage of the regulatory forbearance window that closes on 31 March. Going by the existing norms, if an account is restructured once, it is not classified as a bad asset and banks don’t need to set aside money unless it is a commercial real estate exposure. From April, even if a loan is restructured once, it will be considered as a bad loan and banks will have to set aside money. The industry has restructured about Rs.3.5 trillion through the so-called corporate debt restructuring platform and almost a similar amount through bilateral agreements with borrowers. A recent India Ratings report points out that the level of stressed loans of domestic banks, including restructured debt, may continue to rise and reach 15% by the end of this financial year from over 10% in 2013-14. The Indian banking system could see restructured loans surging by Rs.1 trillion in the remaining months of this financial year. Its estimate is based on an analysis of the credit metrics of top 500 corporate borrowers who accounted for the largest debt in the financial year that ended in March 2014. The sentiment in the stock market has surged ahead of reality; it will take a few quarters for banks to get back to health.

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