Banking stocks take a hit on provisioning worries

Provisioning towards bad loans may remain elevated for corporate banks, PSBs in FY18

The Reserve Bank of India’s (RBI’s) mandate instructing banks to make higher provisions for accounts referred to the National Company Law Tribunal (NCLT) for resolution under the Insolvency and Bankruptcy Code (IBC) came as a jolt for banking stocks on Tuesday. While the overall trading condition was also weak, the news was particularly negative for public sector banks (PSBs). Syndicate Bank, Punjab National Bank, Canara Bank and Andhra Bank took 4-5 per cent hits in their stock prices, while that of State Bank of India, Bank of Baroda, and Union Bank corrected by 2.8-3.7 per cent on Tuesday. Even private banks with relatively high corporate exposure, such as ICICI Bank and Axis Bank, saw their share price fall 1.2 per cent and 2.3 per cent, respectively. 

According to the RBI’s latest directive, banks have to provide 50 per cent for secured loans and 100 per cent for unsecured loans referred to the NCLT, clearly suggesting that provisioning towards bad loans may remain elevated for corporate banks and PSBs in FY18. Given that the Street was expecting moderation in loan loss provisioning in FY18 going by the trend in FY17, the RBI’s latest mandate is clearly negative.

“Based on CRISIL’s assessment of embedded value in the top 50 NPA (non-performing assets) cases, we estimate a 60 per cent haircut would be needed on these loan assets. That would mean banks will have to increase provisioning by another 25 per cent this fiscal year, compared with 9 per cent in FY17,” said Krishnan Sitaraman, senior director, CRISIL Ratings. 

Nonetheless, not all banks may be impacted in the same manner. The CRISIL study indicates that banks have already provisioned about 40 per cent for these NPAs totalling Rs 2 lakh crore, or equal to a quarter of the NPAs in the banking system, even before the RBI’s move (thus, the remaining 20 per cent provisioning works out to Rs 40,000 crore). Also, analysts at Motilal Oswal point out that a majority of the 12 accounts referred to under IBC were recognised as NPAs according to the RBI’s asset quality review (AQR) mandated in September 2015.

The AQR exercise required banks to make an accelerated 20 per cent provisioning on each account mentioned in the list. “Since there have been no resolutions in FY18, based on portfolio ageing, banks would have provided an additional 10-15 per cent on such accounts in FY18. Hence, outstanding provisions on accounts referred to IBC should be around 40 per cent for most large banks. Thus, even without the RBI mandating provisions, by the end of FY19, these accounts would have had a provision coverage ratio of at least 50 per cent or higher, depending on a bank’s prudent provisioning policy,” the analysts explain. This is why the impact of the RBI’s latest directive may be more on mid-sized PSBs where provisioning is relatively low compared to that of private banks and the larger PSBs.

Stocks Tumble

State Bank of India and Bank of Baroda, in the March quarter earnings call, mentioned that provisioning on the top 50 NPAs was over 40 per cent, while most large banks have provided for 40-45 per cent of top 50 NPAs. This, to some extent, reduces the Street’s concerns on elevated provisioning in FY18.

But Nitin Aggarwal of Antique Stock Broking said it may still be too early to quantify the pain ahead. “FY18 loan loss estimates may require upward revision. But, we will get a sense of how much revision is required in the next few days as details emerge,” he said. This is why he believed that banking stocks, particularly the PSBs, may continue to remain under pressure. The recent rally would also encourage investors to book profit in these counters. Analysts, thus, do not rule out another 10-15 per cent correction from Tuesday’s levels as more details emerge.

“But, don’t rush into the correction,” Aggarwal said. He urged investors to wait for all the news to be absorbed by the Street. Once a proper assessment is available, long-term investors could use lower stock prices to accumulate stronger names in this space, analysts said.