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Public Sector Bank Stocks: Management of stressed assets holds the key to profitability

Earlier this month Fitch had revised the sector outlook for Indian banks to ‘negative’ from ‘stable’ in part due to the rapid accumulation of stressed assets that have outpaced capital replenishment.

By: ENS Economic Bureau | New Delhi | Published: July 22, 2016 3:20:16 am
Banking stocks, rbi bad loans, rbi loan defaulters list, rbi sc bad loan list, india loan defaulter list, business news, rbi bad loan defaulters list, india news Market participants say that though the news of recapitalisation brought cheer, there are questions being raised over whether that will be sufficient.

The government’s announcement of Rs 22,915 crore capital infusion in 13 public sector banks was cheered by the capital markets on Tuesday resulting into a big surge in share prices of PSB stocks during the day. However, a rise in the non-performing assets of HDFC Bank and Kotak Mahindra Bank in the quarter ended June 2016 raised fresh concerns over the state of NPAs at PSBs leading to a sharp decline in share price of banks.

On Thursday, the public sector banks lost out on all the gains made after the recapitalisation announcement, thereby reflecting upon the fact that capital infusion is not the only factor that markets are monitoring.

“While recapitalisation of banks was much needed and the amount designated is sufficient for the short-term, concerns over losses of banks and rise in NPAs is something that continues to cloud investor sentiment,” said an analyst with Motilal Oswal.

Between Tuesday and Thursday the 13 PSBs which are the beneficiaries of the recently announced recapitalisation saw their share prices fall by up to 5.9 per cent. While PNB has been the biggest loser and saw its share price fall by 5.9 per cent over the two days, Union Bank of India and Syndicate Bank fell by 4.8 per cent and 4.6 per cent, respectively. SBI’s share price declined 1.8 per cent during the same period.

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Market participants say that though the news of recapitalisation brought cheer, there are questions being raised over whether that will be sufficient.

While ICRA has estimated that PSBs’ tier I capital requirement for FY17 will be in the range of Rs 40,000 crore to Rs 50,000 crore (much higher than the current allocation of Rs 22,915 crore by the government), a report by Fitch Ratings said that Indian banks will need $90 billion (around Rs 6 lakh crore) in total additional funds to meet global capital adequacy norms by 2019.

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“The government’s decision to inject Rs 22,900 crore into 13 public sector banks, including PNB, SBI and Bank of India, is supportive of the credit profiles of these lenders … That being said, this step, on its own, is unlikely to address the pressures on the system driven by economic growth in light of the significant asset quality pressures and weak profitability prospects of these banks,” Fitch said.

Stating that the pressures on credit profile of public sector banks is likely to stay, Fitch said that more capital than the Rs 70,000 crore earmarked through to FY19 will be needed from the government to restore market confidence and position the sector for long-term growth.

Even ICRA in its report said that the shortfall between what is required and what has been provided by the government may continue to impact the PSBs’ loan book growth in FY17 as the possibility of large quantum of capital raising from non-government sources remain limited as of now and PSBs internal capital generation is likely to remain muted on the back of significant pressure on their asset quality.

RBI’s monthly credit growth data shows that while it was picking up steadily between June 2015 (8 per cent) and February 2016 (9.7 per cent), it dropped sharply in the following three months and hit a low of 8 per cent in May 2016.

The Fitch report points that the slowdown in credit growth is also a result of losses accumulated by PSBs. Pointing that losses at PSBs in the second half of FY16 was double the government’s capital injection in the year, the report said: “This caused loan-book contraction at many public banks, which brought sector-wide credit growth to below 10 per cent in 2016, the lowest increase in a decade.”

Therefore, while adequate recapitalisation is important, it is also necessary that banks stop accumulating further losses and witness a decline in their NPA levels. A Banking analyst said that while continued slowdown in industrial growth and high unutilised capacity is currently leading to a decline in credit off-take, banks’ ability to lend may emerge as a major challenge when the economy takes off and there is demand for credit.

Earlier this month Fitch had revised the sector outlook for Indian banks to ‘negative’ from ‘stable’ in part due to the rapid accumulation of stressed assets that have outpaced capital replenishment.

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