Thanks to rising bad loans, bank stocks (especially public sector banks) have remained the ugly ducklings all through FY12. Gross non-performing assets (GNPAs) of the sector rose by 46 per cent in FY12 at Rs 1,32,100 crore. This sharp jump in the sector’s bad loans was driven largely by the country’s largest lender, State Bank of India (SBI), which accounts for 30 per cent of the sector’s GNPAs. Not surprising, then, that after SBI reported a record quarterly profit after tax of Rs 4,050 crore and reported lower slippages (Rs 4,300 crore) in Q4 FY12, the perception was that the worst was over for the banking sector. However, as reiterated by the central bank, deteriorating macros, sharp slowdown in industrial activity and asset quality challenges will continue to haunt banks in FY13, too.
This spells trouble for banks. Credit quality trends are unlikely to improve in FY13, as industrial production is particularly weak, corporate leverage is high and the power sector will require restructuring, says Anish Tawakley of Barclays. Given that the industrial sector accounts for 45 per cent of bank credit, a protracted slowdown in the sector spells difficult times for banks in FY13. Interestingly, while credit quality will remain under stress, quarterly trends suggest that fresh accretion of bad loans has peaked and that new slippages will plateau in FY13 at 1.7-1.8 per cent of loans.
Analysts say looking only at fresh slippages is not the best way to assess whether the worst is over. A big threat to credit quality also comes from a sharp rise in corporate debt restructuring referrals. Bank of America Merrill Lynch Global Research is estimating a 46 per cent year-on-year jump in restructured book in FY13 — restructured book at 6.2 per cent in FY13 vs 4.9 per cent in FY12. While many analysts are expecting a substantial portion of the restructured debt to turn into bad loans, Bank of America Merrill Lynch’s discussions with banks indicate that, “most of the restructuring this time around is ‘deep’ restructuring on capital expenditure/infrastructure projects versus the ‘shallow’ restructuring done by banks three years ago. Hence, post-restructuring, the projects should commission and the chance of non-performing loans in this restructuring phase is lower than the last time around”. Additionally, the provisioning for restructured assets is lower (10-12 per cent) compared to non-performing loans (15-25 per cent), so CDRs have a lower impact on earnings.