'Can Bank of India, Canara Bank sustain better NPA performance?

While higher recoveries helped outscore their PSU peers in Sept quarter, trend may be difficult to sustain given the large restructuring pipeline and weak macro environment

In an environment wherein most large public sector banks continued to bleed due to their worsening asset quality, Bank of India (BoI) and Canara Bank bucked the trend. For the September quarter, these two banks witnessed drop in gross non-performing assets (NPA) and net NPA ratios. While increased focus on recoveries drove this outperformance on asset quality, experts believe this improvement is unlikely to sustain going forward. Large restructuring pipelines, high loan growth at lower base rates and weak CASA franchise are likely to be key pressure points on these banks' asset quality as well as profitability.

While 40 per cent of analysts according to Bloomberg have a buy on Bank of India, only about 14 per cent are bullish on Canara Bank. Though both these stocks are trading at inexpensive valuations, a sustainable stabilisation of their asset quality and loan growth is crucial for more analysts to turn positive on these scrips.

For the September quarter, Canara Bank's gross and net NPA ratios declined sequentially. While gross NPA ratio remained stable on a year-on-year basis, net NPA ratio inched up by 20 basis points. Notably, the amount of fresh loans restructured by the bank in the September quarter fell 65.2 per cent compared to the March 2013 quarter, and stood at Rs 2,880 crore.
Canara Bank's focus on improving recoveries and higher write-offs have led to better asset quality, believe analysts. The bank's credit cost stood at 0.5 per cent and was lowest over the past seven quarters. Overall, its asset quality improved significantly.

"This has been possible because of three pronged approach; one was monitoring of all the accounts which enabled us to prevent slippage. Second was efforts in upgradation and cash recovery. Third factor was, high credit growth of 30.3 per cent", said R K Dubey, Chairman and Managing Director, Canara Bank in a post-results call with analysts.

However, the bank's restructuring pipeline stands at Rs 3,000-3,500 crore, indicating that the relief on asset quality could be short-lived. As per the bank management, SEB loans worth about Rs 2,300 crore are likely to be restructured in the second half of FY14. Key accounts such as Educomp (Rs 210 crore), Ideal Energy (Rs 420 crore), amongst others could also be restructured in the forthcoming quarters.

"Moderate slippages coupled with higher recoveries and write-offs led to nearly stable gross NPAs for Canara Bank, but the ratio was down sequentially due to strong loan growth. The restructuring pipeline remains high", says Siddharth Teli, MD and co-head, institutional Research, Religare Capital Markets.

The bank's strategy of aggressively growing loans with focus on small and medium enterprises and retail segment along with its low base rate is likely to put financials under pressure, believe analysts.

"Canara Bank management has guided for a stronger recovery in second half of this fiscal led by pick-up in loan growth to 24 per cent in FY14. We believe the stance adopted by the management for aggressive growth may add further pressure on asset quality as the overall macro environment continues to remain weak and less conducive for aggressive growth", says Alok Kapadia, Banking analyst at Antique Stock Broking.

In the case of Bank of India, the gross and net NPA ratios fell both sequentially and year-on-year. Positively, both these metrics were at their lowest levels since the September 2012 quarter. BoI, too, has taken various steps to improve asset quality which have started paying off.

Vijayalakshmi R Iyer, Chairperson and Managing Director, Bank of India, says, “It has been our endeavour during the last four to five months to improve the recovery climate. We have improved our provision coverage ratio and would like to improve it further. The top 100 accounts are being personally monitored by me and they form about 47 per cent of our NPAs. We are giving incentives to the banking correspondents also for recovering the small ticket loans. All these steps are yielding results for the Bank."

In the quarter gone by, however, BoI restructured loans worth Rs 855 crore, higher than the Rs 755 crore it restructured in the June 2013 quarter. Also, the management has guided for restructuring of about Rs 1,000 crore in the December 2013 quarter. Analysts believe the asset quality stress is far from over for the bank.

"BoI's asset quality was strong during the quarter. However, weak macro environment coupled with strong growth in some of the stressed segments does not provide any comfort on asset quality. Further, asset quality remained volatile in the past, which led to significant pressure on earnings and sharp deviation in estimated versus reported profits. Hence, we wait for a more sustainable trend to emerge", says Alpesh Mehta, banking analyst at Motilal Oswal Securities.