Bank of India: Rs 70-bn NPA recovery may not move the needle much in Q4

Provisions required under new NPA rules may offset gains on recovery front, therefore, experts suggest that investors keep away from PSBs for now

Shares of Bank of India, which are down a third since the fraud at Punjab National Bank was reported (February 14), an event that hit other public sector banks (PSBs) too, surged 15 per cent before closing 7.4 per cent up on Tuesday. Reports of the bank recovering non-performing assets (NPAs) worth Rs 70 billion was the key reason for this surge. "We (BOI) have recovered around Rs 70 billion, which will reflect in January-March 2018 quarter (Q4) performance," the bank's MD and CEO, Dinabandhu Mohapatra, said to a television channel. A mail sent to BOI did not elicit any response. However, Mohapatra said the bank hopes to recover another Rs 20-30 billion of NPAs in a few months.

While this is good news for a bank weighed down by bad loans (net NPA at over 10 per cent of advances in Q3) and should reflect positively in Q4, its overall earnings may not improve significantly, say analysts.

Firstly, the new NPA rules introduced by the Reserve Bank of India (RBI) on February 12 will increase the provisioning pain of all banks, especially PSBs, in Q4. "Provisioning requirement in Q4 will be much more. On an average 60 per cent of the outstanding standard restructured assets are expected to be recognised as NPAs (by PSBs) on the back of the new NPA rules," says Shailendra Kumar, chief investment officer, Narnolia Securities. On this basis, incremental NPAs due to the new NPA framework could mean additional provisioning of Rs 64 billion for BOI, given its standard restructured portfolio of Rs 106.3 billion in Q3. While the exact details are not known, "for BOI, of course, there will be some increase in NPA because of that (new NPA rules) guidelines," the MD mentioned in the interview.

Secondly, yields on the 10-year government securities (g-sec) have risen 30 basis points in Q4 (till March 13) to 7.33 per cent, compared to December 31, 2017 levels. This will also hurt public sector banks, including BOI, in Q4. When yields on G-Sec increase, the market value of such securities declines, requiring banks to make provision for mark-to-market losses of their AFS (available for sale) bond holdings. In Q3, BOI provided Rs 9.1 billion for such notional losses, or about 67 per cent of its operating profits.

Meanwhile, improvement in NPAs is expected in FY19 as most of the NCLT (National Company Law Tribunal) cases are seen resolving by June 2018, which will enable banks to reverse provisions already made. BOI, too, has provided for 65 per cent of its NPAs and even more for some bigger accounts, which are under the last stage of bidding process at NCLT. "In some big accounts, we have provided 100 per cent. So, we are expecting write-backs on those accounts that will help us to manage all these new developments (like new NPA rules)," the MD noted.

While these developments are positive, there is still uncertainty over the timeline and quantum of amount regarding NCLT cases. Likewise, provisions required under new NPA rules may offset gains on recovery front. Thus, experts suggest that investors keep away from PSBs for now.