Exit from prompt corrective action not enough to boost BoI, OBC, BoM stocks

Despite Bank of India (BoI), Oriental Bank of Commerce (OBC) and Bank of Maharashtra (BoM) making an exit from the Prompt Corrective Action (PCA) framework imposed by the central bank about a year ago, markets didn’t seemed thrilled. The stocks extended Friday’s losses. While OBC took a milder hit of less- than-a-per cent fall on Monday, BoI and BoM fell 1.5 per cent and 5 per cent, respectively. 

The reason being, even after exclusion from PCA, the Street remained sceptical about the banks’ near-to medium-term prospects. G Chokkalingam, MD, Equinomics Research and Advisory said, in the current form, their financials were still far from being sound. “Non-performing asset (NPA) ratios could have cooled off for the banks in the December quarter (Q3), but at six per cent, they are far from comfortable even for public sector banks’ (PSBs’) standards,” he emphasised.

BoI and BoM managed to reduce their net NPA ratios from seven -10 per cent a quarter ago to less than six per cent in Q3, while that of OBC’s fell from 10.1 per cent to 7.2 per cent during the period. 

 

However, the same came at the cost of profits (as banks made significant provisions for bad loans), prompting analysts to think that reduction in NPAs has happened in a quite rushed manner, with the objective of exiting the PCA framework. To put things in perspective, BOI’s net losses swelled to Rs 4,738 crore in Q3 versus a net loss of Rs 1,156 crore in Q2; bad loan provisions surged from Rs 3,343 crore in Q2 to Rs 9,001 crore in Q3. Similarly, BOM posted a quarterly loss of Rs 3,764 crore versus Rs 27 crore of net profit in the September quarter. OBC is the only one to float in the green, despite a huge cleaning up exercise in Q3. Its net profit increased by 42 per cent, sequentially, to Rs 145 crore in Q3. However, analysts observed that for the banks to maintain or reduce NPAs further, profitable growth might remain elusive for a while. 

Under these circumstances, and since these banks now have no restrictions on lending, it will be interesting to see how they improve their loan growth without piling up on poor quality loans. Thus, Chokkalingam cautioned investors to stick to quality PSBs. 

“At current valuations, State Bank of India, Bank of Baroda and Indian Bank offer more confidence,” he stated.