With almost every public sector bank reporting huge losses, 2017-18 will go down as the year the banking sector would rather forget. The combined loss of Rs 85,168 crore posted by PSU banks is way more than the combined gains made by them in previous years. However, despite the humongous losses, the stock market has not reacted negatively to the results, choosing to believe that the worst is over.
Private sector banks have also been under pressure in 2017-18. For example, Axis Bank reported a net loss of Rs 2,189 crore in the fourth quarter of 2017-18, wiping out almost the entire profit it made in the previous three quarters. Some smaller banks like Lakshmi Vilas Bank and Dhanlaxmi Bank have also reported losses. Due to this, the combined net profit of private sector banks in 2017-18 came down by 6% compared to the previous year.
Combined net profit of private banks have been steady
PSU banks continue to report losses due to NPA issues.
Secondly, much of the current banking sector mess can be blamed on the RBI. It allowed banks to keep restructuring doubtful loans in the past. As banks kept on reporting low NPAs in the past using this ‘ever-greening’ technique, the asset quality rot grew bigger. Finally, the RBI pulled the plug. “With RBI taking a strong stand, banks are being forced to recognise all their existing NPAs. Therefore, we can say that the worst is behind as far as NPA recognition is concerned,” says Asutosh Kumar Mishra, Senior Research Analyst, Reliance Securities.
The banks will have to provision for them in the coming years.
Source: Source: ETIG Databse
The recent amendment of the Insolvency and Bankruptcy Code (IBC) is also helping. “The amendments will safeguard the interest of lenders and spur the pace of resolution under IBC. The fine tuning of Section 29(A) of IBC should also help increase the number of eligible bidders significantly,” says Krishnan Sitaraman, Senior Director, Crisil Ratings. So, some accounts marked as NPAs may get reversed if there is some resolution during the bankruptcy procedure at the National Company Law Tribunal (NCLT).
However, investors should not expect banks to start reporting high profits now. This is because a major part of the recognised NPAs are not yet provided for by banks and are still sitting in their books as net NPAs (see chart). “Be ready for continued provisioning by banks for two more quarters, so credit costs will come down in the second half of 2018-19,” says Purohit. While the worst is over in terms of recognition of bad loans, profitability remains a concern. However, huge losses like what was reported in the fourth quarter of 2017-18 seem unlikely. “While profitability pressure will continue for another year, it will be characterised by subdued profit and not by big losses,” says Mishra.
Sharp correction in valuations is another reason why analysts are getting bullish on this sector. “Due to sharp corrections in the valuations in PSU banks and corporate oriented private sector banks, some of them are now quoting at reasonable valuations and are worth investing in,” says Purohit. Analysts are optimistic about well managed PSU banks like Indian Bank (gross and net NPA at 7.37% and 3.81% respectively). “Indian Bank is one of the best managed PSU banks and it has outperformed private sector banks on several parameters,” says Mishra.
No discussion about the banking sector is complete without covering the retail oriented private sector banks that are now quoting at high valuations. For example, some like Kotak Mahindra Bank and HDFC Bank are quoting at historical PE ratio of 40.57 and 30.38 times respectively. So is there a worry about a valuation bubble? “Most of the retail oriented banks have been quoting at high valuations for years. Since their growth rate is high, valuation is not a big concern,” says Purohit.
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