Asset quality problems ravage PSU bank earnings

Punjab National Bank has restructured Rs2,770 crore worth of loans in the June quarter
 at a pace similar to that in the first three quarters of the last fiscal year. 
Photo: Pradeep Gaur/Mint

live Mint ;Ravi krishnan :28 July 2013

The 11 state-owned banks that have declared their earnings have seen their combined gross NPAs jump 46.8%

The June quarter earnings of state-owned banks have confirmed the worst fears of investors. Asset quality problems continue to persist, not surprising given the wheezing economy.

The 11 state-owned banks that have declared their earnings so far have seen their combined gross non-performing assets (NPAs) jump 46.8% from a year ago. While that number might pale in comparison with the 65% plus increase in bad loans in some quarters of the previous fiscal year, note that the increase in the June quarter is from an already large base.

What’s more, the nine private banks that have declared their earnings so far have reported a 22.13% jump in bad loans, the highest pace in at least three years. Given that they are perceived to have more prudent lending practices (largely because no finance ministry mandarin is breathing down their necks), it is yet another indicator of worsening macro fundamentals.

Secondly, there is not much respite in loans recast in the June quarter as well. Punjab National Bank, for instance, has restructured Rs.2,770 crore worth of loans in the June quarter at a pace similar to that in the first three quarters of the last fiscal year. What’s even more disheartening is that the slippages from its restructured loans have reached 20%, according to Emkay Global Financial Services Ltd.

Central Bank of India recast Rs.3,000 crore loans, taking its total restructured book to 13.2% of advances. With 6% gross bad loans, total loans at risk are almost at one-fifth of its Rs.1.74 trillion loan book.

The resultant increase in provisioning expenses, of course, had an impact on profits of public banks. Net profit growth for this grouping declined 6.51% from a year ago compared with a 25% gain for private banks. To be sure, operating profit growth of 21.43% for the state-owned banks that have declared results was the highest in five quarters. But then, that didn’t come from any dramatic gains in interest income, but rather from trading gains, which pushed up non-interest income by 52%.

Even the money set aside for bad loans doesn’t seem enough as declining provision coverage ratios indicate. Punjab National Bank’s provisioning cover stands at 40%, while Central Bank of India’s is at 42.5%. The large portfolio of restructured loans will mean more provision in the coming quarters (0.75% to be spread over four quarters this financial year) because of new Reserve Bank of India rules, thus putting future profits at risk as well.

Thus, even if government-controlled bank valuations appear cheap, and some of them are trading below book value, asset quality concerns will drive away investors in the medium term.