Too early to say PSU banks' asset quality has recovered: report

While asset quality has seen an improvement, macro-economic situation has not, says Espirito Santos Securities

Public sector banks have seen an improvement in asset quality, with lower gross slippages, during the third quarter. But it is too early to assume asset quality recovery as there is not fundamental improvement in the macro-economic situation, said a report by Espirito Santos Securities.

Also, several key issues plaguing the banking system, such as the uncertainty over the exposure to power and infra sectors and high concentration towards certain large highly leveraged corporates, remain unaddressed.

According to the report, despite incremental gross slippages for all PSU banks declining by 16% during Q3 FY13, the gross slippage ratio still remains high at 2.9%.

"Our analysis of asset quality in the past eight quarters shows that asset quality has been volatile and one quarter of improved asset quality cannot be termed a recovery, as there has been minimal macro-economic improvement on the ground, with Q3 FY13 GDP growth at 4.5% (below market expectations), power and infra sector issues unaddressed and excessively leveraged large corporates," the report said.

However, in the past four to five months there have been several instances of positive news flow, both from the government and large corporates, on policy reforms (State Electricity Boards restructuring, diesel price hike), deleveraging (non-core asset sales by DLF, Hotel Leela, GMR) and equity infusion from promoters (Suzlon). These events are a step in the right direction, and we expect them to have a positive impact on the banking system in the next six to eight quarters, the report added.