Q4 results: High NPA recognition, growth visibility boost PFC sentiment

REC, too, reported additional slippages on account of RBI's new NPA framework

Despite deterioration in asset quality in the March 2018 quarter (Q4), shares of Power Finance Corporation (PFC), which were down over 40 per cent in the past one year, surged 6.5 per cent on Monday. The recognition of stressed loan assets has turned investors' sentiment after Q4 results.

Though not mandated, PFC, the power sector lender, also complied with the Reserve Bank of India's (RBI's) new non-performing assets (NPAs or bad loans) framework announced on February 12 for banks. 

This resulted in additional slippages from private loans. Consequently, PFC’s restructured pool reduced sharply to 8.6 per cent of gross advances as of March 2018 from 21.6 per cent as of December 2017, indicating lower provisioning pain going ahead. 

Notably, 82 per cent of its loan portfolio, as of March 2018, is accounted by the government sector of which 89 per cent comprises standard loans. 

Also, even as it was below analysts' expectations, PFC's operational performance is showing improvement. PFC posted Rs 9.4 billion of net profit in Q4 versus net loss of Rs 34.1 billion in Q4FY17. 

Analysts were expecting around Rs 15 billion net profit in Q4. 

A 14 per cent rise in advances improved NII (net interest income) but, was restricted by interest reversal due to implementation of RBI's new NPA rules. 

PFC's outstanding sanctioned loans, as of March 2018, at Rs 1.46 trillion (half its loan book) provides strong growth visibility. 

"Clean-up exercise is a positive development for PFC as its capital position (Capital adequacy ratio of 20 per cent) is strong and past concerns regarding lack of transparency on asset quality are being addressed," Quantum Securities said. 

Analysts expect a large part of PFC's private-sector loans of Rs 508 billion to turn bad in FY19 (Rs 307 billion is stressed, as per PFC) and expect some write-backs, too, on account of loan upgrades (Rs 170 billion) in FY19.

Similarly, Rural Electrification Corporation (REC), which announced its Q4 result on Monday post market hours, also followed RBI's new NPA framework and recognised Rs 95.9 billion of assets as NPAs, leading to high interest reversal and fall in the net profit. 

With this, REC's restructured assets are expected to have lowered. In anticipation, REC's stock, which has also been a laggard, surged 5 per cent on Monday.

Overall, the moves by PFC and REC are positive and should support their stocks.