The Indian
banking sector, especially the state-owned entities, have hogged the limelight
as the government’s announcement of a fiscal neutral capitalisation raised
hopes of a revival of not only these entities but also the long-buried capex
cycle. The quarterly results, therefore, got somewhat relegated to the
background. Now that the dust appears to be settling, it is worth checking on
the numbers as well as the grand recapitalisation plans to explore if the
fortunes of the sector are really changing or is it another hope rally that is
likely to dissipate?
PSU
Banks in Q218
The analysis of
the 21 listed PSU (public sector) banks suggest an improvement in operating
performance with a sequential growth in operating profit. However, the higher
provisioning mostly on account of the bad assets that have been referred to
NCLT (National Company Law Tribunal) dented profitability.
So, the
overall profitability of the banking sector was driven by the private sector,
which delivered a bottomline of Rs 10,632 crore.
NPL
addition falling
What stood out
in the quarterly performance of PSU banks was the muted net addition to gross
NPL (non-performing loan). For the aggregate, the net addition to the stock of
NPL was only Rs 1,959 crore which is a sharp decline from the previous quarter.
Individual results from the banks also point to declining slippages
quarter-on-quarter. Thanks to the higher provision, the overall provision
coverage ratio (the percentage of provision that a bank carries against its bad
loans) for the group improved by 280 basis points to 46 percent.
The road ahead
However, the
future roadmap is contingent on two parameters – business growth and asset
quality -- that deserves greater scrutiny.
Lack of capital,
and asset quality concerns of PSU banks have been a boon for many of their
private sector counterparts as evident from the incremental market share gains
in the first half of the current fiscal.
What has
worsened the situation for PSU banks is the well-known asset quality problem
and lack of core capital to expand business. A large number of banks have CET1
(common equity tier 1) ratio that is below the required 8 percent minimum that
will be applicable from FY19.
The
danger signals
If one were to
prudently adjust the net non-performing assets from the core capital of the
banks, some of the banks of the likes of Bank ofMaharashtra, Central Bank of India, Corporation Bank, IDBI Bank, Indian Overseas Bank, UCO Bank and United Bank of India have completely eroded their capital.
In
fact, most of these entities are actually de-growing their asset book and have
very little visibility. It is worth noting that the combined balance sheet of
these chronically troubled entities is close to Rs 17.8 lakh crore with the
size of the asset book of approximately Rs 10.6 lakh crore. It is a question of
time before these businesses migrate to stronger PSUs or private sector banks.
Will the Great Indian Capitalisation salvage all?
The answer, although
premature, may be unequivocally no. If one looks at the aggregate number, the
picture is crystal clear. At the end of September 2017, the stock of NPA that
doesn’t carry provisions is approximately Rs 4 lakh crore.. If one considers
the declared restructured assets of the PSU banks to the tune of Rs 1.7 lakh crore,
then on this Rs 5.7 lakh crore if conservatively a provision of 45 percent were
to be created in the next two years, the provisioning requirement will be close
to Rs 2.6 lakh crore. . In essence, it means the recapitalisation amount (Rs
2.11 lakh crore) will mostly be used up for provisioning on assets that are
already turning sour without providing much life to the patient in critical
care, leave alone the medicine to make them run. So the weak are unlikely to
turn strong because of this exercise alone.
In the coming six to
eight quarters, the PSU banks may continue to show elevated provisions that
might impact profitability, although incremental slippage may not rise.
Back to survival of the fittest?
The government is
likely to distribute this capital wisely to make the well-run banks stronger,
perhaps with more autonomy and flexibility on top of capital to enable them to
truly compete in the global arena. So investors have got to be discerning in
choosing their bets.
We feel that
well-capitalised private entities will continue to gain market share at the
expense of PSU banks as the provisioning pain will linger on for a while for
government banks. Although recapitalisation will gradually start alongside
resolution of stressed assets, the big issue of restructuring and right sizing
of PSU banks might have to wait beyond the General Election of 2019.
However, we are
hopeful of some serious gains coming out of this bank
recapitalisation/restructuring exercise in the medium to long term. While we do
not wish to speculate on the survivors, we have identified nine banks (the six
relatively large ones -- State Bank of India, Punjab National Bank, Bank of India, Bank of Baroda, Canara Bank and Union Bank of India) and three better-managed smaller entities -- Indian Bank, Syndicate Bank and Vijaya Bank-- that will catch investor fancy as the sector
remains at the pinnacle of action.
Weak bank if inevitable may merge with some private or PSU bank they must keep AC holders informed as early as possible and also exit options time
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