Turnaround in bad loans not in sight yet for PSU banks

CARE Ratings has tabulated results of 30 banks, which have declared Q2, 2018-19 results. The focus was on trends in gross NPAs (non-performing assets) as a per cent of advances. There seems to be an improvement over the last two quarters. Tighter NPA recognition norms led to a surge in bad loans over the last two years. But overall NPAs have reduced and provisioning has also reduced in the last two quarters.

This group of 30 includes most large private and PSU banks including State Bank of India (SBI), HDFC Bank, ICICI Bank, Punjab National Bank (PNB), Bank of Baroda, etc. NPAs hit a peak of 10.16 per cent of all advances in Q4 (Jan-Mar 2018) and then eased down to 9.95 per cent in Q1, and dropped further, to 9.41 per cent in Q2. For 13 banks, the NPA ratio has been progressively lower for two quarters. For another eight, the ratio dropped in Q2 versus Q1. One bank (DCB) has a constant, low ratio. But the ratio has risen for 8 banks.

The big private sector banks, which influence the Nifty Bank index due to the high weight of free float holdings, are mostly in reasonable shape. HDFC Bank, IndusInd Bank and RBL have low NPAs, which have declined further. Axis Bank has a high ratio which has dropped from 6.77 per cent (Q4, 2017-18) to 5.96 per cent (Q2, 2018-19). ICICI Bank has a very high ratio, but it has come down to 9.3 per cent from 9.9 per cent. YES Bank shows a worrying pattern with NPAs rising, but the Q2 ratio of 1.6 per cent is still low.
 

Among smaller private banks, Dhanlaxmi Bank and Laxmi Vilas Bank have seen an increase in NPA ratios to 7.8 per cent and 12.31 per cent respectively. Karur Vyasa Bank also has an increasing ratio, at 7.7 per cent in Q2.

Among PSU banks, six of the 13 in this group have lower ratios in the last two quarters and this includes Andhra Bank, Canara Bank, Indian Overseas Bank, PNB, SBI, Vijaya Bank and J&K Bank (the majority shareholder is the J&K state). This is a healthy trend. However, NPA ratios are still very high. Only three PSU banks have NPA ratios below 10 per cent - Vijaya Bank (5.86 per cent) and J&K (9.9 per cent) and SBI (9.95 per cent). Provisions shot up in Q4, 2017-18 to Rs 1.125 trillion from Rs 550 billion in Q3, 2017-18. However Q1, 2018-19 saw provisions reducing to Rs 576 billion and in Q2, provisions reduced to Rs 507 billion. However, nine banks increased provisions in Q2, compared to Q1.

These data may mean a trend towards healthier balance sheets. The rating agency makes certain assumptions. One is that the trend will continue, with no sudden surge in recognitions, or new NPAs. Another assumption is that banks are being honest and not trying to dress up results by reducing provisions/ or under-recognition. The Reserve Bank of India (RBI) has punished the management of private sector banks for this, but it cannot really punish PSU managements.

This in no sense can be considered a turnaround yet. The NPA ratios are much too high and there are no guarantees that the trend of reduction will continue. One other positive factor is that low inflation gives RBI the leeway to hold rates or even cut. Optimists can hope for a surge in credit demand - it has been in single digits for far too long. Or, there could be a rise in corporate profits, which helps to reduce the NPA burden. Ideally, both a credit surge and better corporate working will coincide. Obviously, the most scope for turnarounds exists in PSU banks.