The Nifty PSU Bank stocks index may not be enthused much by the Rs 410 billion capital infusion plan of the government.
While the index trades in the red, down 1.6 per cent on Thursday, select public sector banks’ (PSB) stocks, namely Vijaya Bank, Central Bank, Corporation Bank and Bank of Maharashtra, traded positively.
The latter two, along with Allahabad Bank and Bank of India (BOI), are expected to be removed from the prompt corrective action (PCA) list soon, according to media reports.
While questions are raised around how removal from the PCA framework would help these weak banks, some say BOI could be a beneficiary.
“Efforts that BOI has taken to reduce its non-performing assets (NPA) are paying off. If the bank gets support on its assets side or loan book, its balance sheet could improve,” says a banking analyst.
With net NPA ratio of 7.6 per cent in September quarter (Q2), BOI’s share of bad loans is the lowest among banks under PCA, despite its loan book shrinking over the last 18 months. The bank’s loan book is down from Rs 3.94 trillion in FY17 to Rs 3.76 trillion in Q2. Its deposit base has also eroded — down 6 per cent year-on-year to Rs 5.12 trillion in Q2.
Yet, with a loan-to-deposit ratio of 65 per cent, the bank has adequate leeway to utilise deposits effectively. Additionally, the bank has also improved its provision coverage ratio to 58 per cent in the September quarter, which is at par with non-PCA PSBs. Profitability, too, has risen from 1.9 per cent in FY18 to 2.3 per cent in Q2.
While these point at improvement, the Rs 36 billion exposure to the beleaguered IL&FS group, which has until now been classified as a standard asset, is a big overhang for the bank.
If turned into an NPA, it could worsen the return profile, which is already in deep red. Return on assets and return on equity stood at -0.8 per cent and -13 per cent, respectively, in Q2.
Therefore, experts say that while exiting the PCA framework could be positive in the medium term, for investors the BOI stock trading at 1x its FY20 book value could be a value trap.
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