PSU bank stocks bleed on NPA worries

Shares of public sector banks were among big losers on Monday with losses as high as 11 per cent.  State Bank of India (SBI) was the biggest loser among banking stocks in the Nifty, down 4.4 per cent, followed by Bank of Baroda (BoB) and Punjab National Bank (PNB), which were down 3.2 per cent and 2.7 per cent, respectively. Bank of India was the biggest loser among all bank stocks, down 11.2 per cent over Friday’s closing.

Public sector bank (PSB) stocks have witnessed exuberance since the issuing of an ordinance to clear bad loans. But as the reality sank in, there was bound to be profit-booking, analysts said. After a Monday’s fall, the PSB stocks are down 2-22 per cent since May 4, when the ordinance was issued. March quarter results of leading PSBs such as SBI, PNB, BoB, Bank of India (BoI), Canara Bank (Canara), and Union Bank (Union) reflect weak financial health.

As loans that turned bad remained elevated for these banks (SBI’s on a consolidated basis), their provisions also grew at a rapid pace and pulled down profits. Bank of India reported a much higher than expected net loss, reversing the turnaround of the September and December 2016 quarters, which had followed four consecutive quarters of losses.

SBI though is a different case as a strong showing by the parent was pulled down by its subsidiary banks. The merger of SBI with its associate banks is complete and the bank will start reporting consolidated results from 2017-18.      

Analysts say the asset quality pain for SBI is likely to continue for a few quarters.

These results do not factor in impending write-down of loans. Given the weak balance sheets of most PSBs, their ability to take haircuts is limited, believe analysts. The going will get tougher for PSBs before any sustained improvement in their asset quality or growth. 

"With provisioning cover of about 33 per cent on stressed loans, even a 50 per cent haircut could lead to about a $20 billion (Rs 129,000 crore) clean-up bill for the PSBs. The ordinance in itself is unlikely to support a rally in PSBs for long," said Ravi Singh, banking analyst at Ambit Capital.

While the ordinance was a step in the right direction, analysts said, it might not be sufficient. There are questions about whether there will be buyers for the stressed assets, who will foot the write-offs required to clean up the banks' books, and how PSBs resolve their balance sheets issues after these write-offs.

There is another issue worrying the street. While the noise around consolidation of PSBs has grown, the merger of SBI with its associate banks raises questions about the feasibility of such matchmaking. SBI’s subsidiaries ate into the profits of the parent, increased asset quality stress and pulled down the bank's return ratios. 

Arundhati Bhattacharya, SBI's chairperson and managing director (CMD), stated in recent media interactions that it would take at least two years for the bank's return on equity ratio, which indicates profitability, to come back to the double digits. 

Sunil Mehta, managing director and chief executive officer of Punjab National Bank, told Business Standard that the bank was focusing on improving its profitability before taking a view on consolidation.