NPA recognition cycle seems peaked for PSBs

NPA recognition cycle seems peaked for PSBs
NPA recognition cycle seems peaked for PSBs

While private sector banks have started showing some recovery in earnings trajectory,  the results of public sector banks declared so far indicate that the elevated bad loans recognition cycle has peaked for them and earnings recovery could start from FY20. On Tuesday, Bank of Baroda posted a 321.6 percent year-on-year (YoY) increase in its December quarter net profit at Rs 471.21 crore on strong growth in interest income and improved asset quality. The bank had logged a net profit of Rs 111.78 crore in October-December 2017.

Both gross non-performing assets (NPA) and net NPA declined for BoB. The gross NPA ratio stood at 11.01 percent for Q3FY19 compared to 11.31 percent a year ago, and 11.78 per cent in the September quarter.
Similarly, the net NPA ratio declined to 4.26 per cent in Q3FY19 compared to 4.97 per cent a year ago and 4.86 per cent in the September quarter.

On the other hand, Bank of India on Monday reported a widening of its net loss to Rs 4,737.56 crore in the third quarter ended December 2018, hit by nearly two-fold jump in provisioning for bad loans. Bank of India’s (BOI) net loss was Rs 2,341.20 crore in the October-December period of 2017-18. BOI provisions for bad loans soared to Rs 9,179.48 crore in the December quarter, up from Rs 4,373.06 crore in the same period previous year.

Gross NPAs were down slightly at 16.31 per cent of the gross advances from 16.93 per cent a year ago while the net non-performing assets (NPAs) were down to 5.87 per cent of the net advances as on December 31, moving closer to exiting the RBI's PCA framework.

Public sector lender Canara Bank reported a 152.50 percent on-year growth in third quarter profit at Rs 317.52 crore. Asset quality also improved during October-December period. Gross non-performing assets (NPA) as a percentage of gross advances were lower at 10.25 per cent against 10.56 per cent in previous quarter and net NPA was down at 6.37 per cent against 6.54 per cent QoQ.

Siddharth Purohit, research analyst, Institutional Equities at SMC Global Securities, said, "Most of the public sector banks have not reported incrementally higher slippages this quarter, which provides some comfort. Since public sector banks are undervalued, therefore, any improvement in their asset quality will be taken positively by investors. Earnings recovery could start happening from FY20 for PSU banks.”

“Private banks have started showing a recovery in their earning trajectory. We prefer well-capitalised private sector lenders such as HDFC Bank, ICICI Bank,” added Purohit.

Axis Bank reported 131 per cent year-on-year (YoY) surge in standalone profit at Rs 1,681 crore aided by jump in other income. The bank had posted a profit of Rs 726 crore in the year ago period. Another comforting metric was an improvement in asset quality. The gross NPA ratio improved to 5.75 per cent from 5.96 per cent on a sequential basis. The net NPA ratio stood at 2.36 per cent down from 2.54 per cent in the second quarter of FY18. Recoveries and upgrades stood at Rs 2,620 crore for the quarter. Gross slippages came in at Rs 3,746 crore, up from Rs 2,777 crore last quarter.

However, Axis Bank said that corporate lending slippages stood at Rs 1,887 crore of which 98 per cent came from BB and below rated accounts.

 Axis Bank’s BB and below book now stands at Rs 7,645 crore, which is 1.4 per cent of the bank’s gross customer assets, a significant improvement from the peak at 7.3 per cent earlier.

Lalitabh Shrivastawa- AVP-research, Sharekhan by BNP Paribas, said, “Axis Bank’s positive asset quality performance during Q3 FY19 was the key, further augmented by improved NIMs and lower slippages. We have a Buy rating on the bank.”