Despite SBI reporting Rs 77-bn loss in Q4, worst is likely over for PSBs

Balance sheet clean-up boosts investor confidence, experts expect earnings to improve in FY19

Despite the country's largest lender, State Bank of India (SBI), reporting its biggest quarterly loss of Rs 77 billion and a worsening of asset quality during January-March 2018 (Q4) on Monday, the Nifty index of PSU banks surged 2.8 per cent on Tuesday. The gains came on a day the Nifty and the Sensex fell by almost 1 per cent each. According to experts, even though the Q4 numbers of PSBs that have announced results so far are weaker than expected, earnings visibility is emerging and, in all probability, asset quality worries of PSBs have peaked.

Disasterous quarter

With various developments in the banking space during the last two months of FY18, it was anticipated that Q4 would be tough for PSBs in terms of provisioning. However, the pain of PSBs was more severe because many banks reported higher-than-expected losses. Of the 15 PSBs that have announced their Q4 numbers so far, 13 posted losses. The top two banks in terms of advances, Punjab National Bank (PNB) and SBI, reported their highest quarterly losses. Their combined net loss was in excess of Rs 210 billion in Q4.

What rocked the boat is the Reserve Bank of India’s (RBI’s) new non-performing asset (NPA) framework announced on February 12, 2018; PNB additionally was impacted by the Rs 134 billion fraud. The framework requires banks to recognise their standard stressed asset pool as NPAs if they are unable to come up with resolution plans within a given timeframe. With much of these being recognised as bad loans, PSBs took a sharp hit on this count in Q4. Slippages (accounts turning bad) of the top five PSBs, for instance, jumped 1 to 10 times sequentially, leading to higher provisioning (see adjoining tables); up over 90 per cent sequentially, and 153 per cent year on year.

Not surprising then, the aggregate gross NPAs of the 15 PSBs increased 18.4 per cent sequentially, with the top five PSBs' gross NPA standing at 11-18 per cent of their respective gross advances as of March 2018, against 10-13 per cent in the December 2017 quarter (Q3).

What is more, higher slippages led to some interest reversal (interest on NPAs is not recognised as interest income), which along with tepid credit growth hurt the top line of many PSBs. The aggregate net interest income (NII or difference between interest earned and expensed) of these 15 PSBs was down 5 per cent, year on year in Q4. SBI reported a 5.2 per cent year-on-year decline in NII during the quarter.

Apart from the weak operational performance, the PSBs had to bear additional provisioning for notional loss on reduction of market value of government securities (G-secs) held by them, thanks to elevated bond yields for the second quarter in a row. PSBs are major investors in G-secs. Since any increase in bond yields means a fall in bond prices and vice versa. PSBs have to make provisions for such fall in bond values. SBI, however, provided for all the notional loss in its investment book, despite the RBI allowing banks to spread the losses over four quarters. This pushed up its losses in Q4, and the bank posted a treasury loss of Rs 34 billion.

Less pain ahead

With massive NPA recognition in Q4, experts believe the worst is now over for most PSBs and earnings will start improving in the current financial year itself.  "As of March 2018, stressed assets of many PSBs have reduced drastically, which may warrant some additional provisioning pain in the June 2018 quarter, mainly due to the revised NPA rules of the RBI. However, from the September quarter onwards, provisioning will start reducing sharply, improving earnings, unless no unfavourable macro factor comes in," says Shailendra Kumar, chief investment officer at Narnolia Securities.

Even Rajnish Kumar, chairman of SBI, said during a post-results conference on Tuesday that the asset quality problems had peaked.

This can also be gauged from SBI's numbers because it accounts for one-third of the country's total advances. SBI's stressed pool (net NPAs and watch list) dropped to 6.7 per cent of advances in Q4, from 8.5 per cent in Q3 of FY18. Given the expected resolution of large bad loan accounts pending at the National Company Law Tribunal (NCLT) in the next couple of quarters, there is hope for further improvement in asset quality for public sector banks. Prior to Q4 results, analysts had pegged the value of NCLT-1 list (top 12 accounts) at Rs 2.5 trillion, or a quarter of gross NPAs, of PSBs.

Experts are, however, sceptical of a sharp uptick in credit growth of PSBs due to muted corporate investment and lack of a strong system for retail credit. Analysts suggest only investors with an appetite for risk may consider PSB stocks.