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The Reserve Bank of India’s Deputy Governor S. S. Mundra in an interview with Reuters said that the latest April-June earnings of PSU banks showed "stability" in terms of non-performing assets (NPAs). Though NPAs are not back to desirable limits, RBI is keeping a constant watch, said the deputy governor.
The ten PSU banks that have reported their results have posted a 40 per cent drop in net profit on a year-on-year basis. Eight of these banks are now trading at new 52 week lows.
But the key indicator to watch out for in PSU banks is the trend in non-performing assets and more importantly how slippages are moving on a quarter on quarter basis. The moment these numbers stabilise, banks will stop bleeding and start showing better numbers and will focus on growth again.
But are there really signs of improvement? Some numbers do suggests so. Take the case of Bank of India. The bank posted a 83.9 per cent drop in net profit in the first quarter of the current fiscal as compared to the same quarter last year. Despite the sharp fall in profit which was mainly on account of increase in provisioning by 69.6 per cent, Bank of India still has more assets turning toxic.
As per an ICICI Direct report on the bank, its asset quality deterioration measured as Gross NPAs stood at 6.8 per cent as compared to 5.4 per cent in the previous quarter. GNPA increased steadily from levels of 2.35 per cent in FY12 to 3.2 per in FY14 but shot up to 5.4 per cent in FY14 and in the current quarter stands at 6.8 per cent. However, ICICI Direct expects year end GNPA to slide down to 6.2 per cent suggesting that we might be at the peak of GNPA numbers.
As per an ICICI Direct report on the bank, its asset quality deterioration measured as Gross NPAs stood at 6.8 per cent as compared to 5.4 per cent in the previous quarter. GNPA increased steadily from levels of 2.35 per cent in FY12 to 3.2 per in FY14 but shot up to 5.4 per cent in FY14 and in the current quarter stands at 6.8 per cent. However, ICICI Direct expects year end GNPA to slide down to 6.2 per cent suggesting that we might be at the peak of GNPA numbers.
Banks are encouraged to disclose their NPAs and start taking corrective actions, which is one of the reason for a rise in problematic assets.
PNB on the other hand has posted a 49.7 per cent drop in profit but the NPAs have stabilised. The bank has posted a GNPA of 6.5 per cent in the first quarter of the current fiscal as compared to 5.5 per cent in the same quarter last year but lower than 6.6 per cent posted in the fourth quarter of last year. JM Financial in its report on the bank says that asset quality of the bank is expected to improve going forward, in line with the bank’s management guidance.
Union Bank of India too disappointed on the net profit level which fell by 21.9 per cent in the June quarter as compared to its numbers last year but its asset quality deterioration has stabilised. GNPA at 5.5 per cent is higher than 4.3 per cent last year and 5 per cent in the previous quarter. However, Elara Securities expects an improvement in asset quality with the bank likely to close the year with a GNPA of 5.3 per cent and 4.89 per cent in FY17. HDFC Securities has pointed out that the bank has reported a third consecutive quarter of QoQ decline in slippages. Further, outstanding pool of restructured assets (ex-SEB) stands at only 3.2 per cent of its book, suggesting stronger numbers ahead.
Allahabad Bank posted a 30.3 per cent profit growth on a Y-o-Y basis as well as improvement in its assets. GNPA improved to 5.3 per cent as compared to 5.5 per cent levels in previous quarter. Edelweiss pointed out that incremental stress creation in the bank has taken a breather, slippages are curtailed and restructuring is much lower.
Bank of Baroda was the biggest surprise in the PSU banking space. Even though the bank posted 23 per cent lower profit, the stock moved nearly nine per cent higher. Though GNPA rose to 4.13 percent from 3.72 percent in the previous quarter, Bank of Baroda management pointed out that the additions to bad loans during the quarter had been lower than its initial expectations. It’s Chief Executive Ranjan Dhawan told a news conference "I would love to say that we have seen the worst of the NPAs (non-performing assets) and the restructured and the stressed assets.”
Deputy Governor Mundra is perhaps right that the worst in banking sector might be behind us. With the worst fears plaguing the banking sector behind it, is it time to buy PSU banks?
