Bank stocks not pricing in asset quality risks, investors must book profits

As Supreme Court vacates stay on NPA recognition, bad loans are set to spike; weak growth may also compound the problem

Over the past three weeks, global rating agencies such as S&P Global and Moody’s have been warning that the Indian banking sector may not have come out of the woods yet. While they agree that the bad loan levels of FY18 may repeat, the gross non-performing assets (NPA) at 7.6 per cent in September quarter (Q2) isn’t telling the entire story either. September quarter (Q2) was helped by two months of moratorium and subsequently by the Supreme Court’s intervention on NPA recognition. “For the banks, their NPAs would have generally been higher by 10-60 basis points (bps), in the absence