The Bombay Stock Exchange (BSE) Bankex has been butchered in the past month (down 12 per cent), more so over the past week (seven per cent). Though the broader markets have come under selling pressure in this period, bank stocks have emerged as the enfant terrible. While downgrades and sovereign risks are the obvious reasons, the sector isn’t near the end of its problems.
All through FY12, rising bad loans were a big concern. As a result, state-owned banks, the worst affected, focused on recoveries by setting up recovery cells. However, that’s where the good news ends. As industrial growth grinds downwards and the economy slows further, the incidence of bad loans will continue. Extensive analysis done by Emkay Global throws up some worrying numbers. Emkay’s Kashyap Jhaveri and his team say, “Material risk is likely to emerge in the form of seasoning of non-performing assets (NPA) (migration to lower categories of D2/D3/loss assets). This, in turn, would call for higher (25-75 basis points) incremental NPA provisioning.”
In banking parlance, a loan is considered sub-standard if neither principal nor interest has been paid for 90-180 days. Such an asset requires provisioning of 15 per cent. After the 180-day period, if non-payment continues up to one year, the loan slips into the D1 (doubtful asset one) category, which attracts provisioning of 25 per cent. The second level of doubtful asset attracts 50 per cent provisioning (up to two years) and the third level 100 per cent provisioning (over two years). In fact, bad loans accumulated over the past two years, will now migrate to the D3 category, which will need to be written off entirely. The brokerage says: “Banks like Union Bank, IOB, SBI, PNB and BoI have seen addition of 0.8-1.1 per cent of advances into sub-standard and D1 categories over FY09-11.”
Given that interest rates are not coming down meaningfully and companies are increasingly coming under stress due to slowing growth, gross NPAs are expected to rise 20 per cent in FY13, while credit growth will average at 16-17 per cent.
Another downside risk that seems to be emerging is lower margins. While rates have fallen after the central bank cut the repo rate by 50 bps, deposit rates have not come off. Deposit growth is sluggish and slower than credit offtake, implying that banks will have to borrow to meet lending needs. Also, bringing down deposit rates now seems tough as it will further decelerate growth. Analysts expect net interest margins of public-sector banks to slide 10-15 bps.