1. Speedy clean-up to hit banks’ profits

Speedy clean-up to hit banks’ profits

The high-speed clean-up of banks’ books will hurt earnings growth at state-owned lenders and their ability to raise money from the capital market.

By: and | Updated: February 8, 2016 9:38 AM
public sector banks

Every single PSB, including the country’s largest lender State Bank of India (SBI), trades at below its estimated book value for both FY16 and FY17, Bloomberg data shows. (PTI)

The high-speed clean-up of banks’ books will hurt earnings growth at state-owned lenders and their ability to raise money from the capital market. Following the Reserve Bank of India’s (RBI) directive to banks to provide properly for all exposures by March 2017, there has been a sharp drop in the stock prices of state-owned lenders. However, stocks may not really be as cheap as they appear since cleaner balance sheets would call for more provisioning and probably write-offs too.

The existing and future stress on banks’ books — expected to result in a deteriorating earnings profile — has left the price to book value (PBV) of most PSBs at near two-year lows. The market capitalisation for state-owned lenders as a whole, which was R5 lakh crore in January 2015 crashed to R2.8 lakh crore. That’s just slightly more than the market capitalisation of HDFC Bank of R2.67 lakh crore.

Every single PSB, including the country’s largest lender State Bank of India (SBI), trades at below its estimated book value for both FY16 and FY17, Bloomberg data shows.

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Oriental Bank of Commerce (OBC), Allahabad Bank, and United Bank of India trade at below 30% (or 0.3 times) of their respective forward book values. The book value indicates the net asset value on the balance sheet. After losing more than a fourth of its value so far, SBI now trades at 0.7 times estimated FY16 book value per share of R233.

RBI has asked lenders to provide more for ‘emerging stress’; it would also like to see exposures being classified uniformly across a consortium so that any stress in an account is captured evenly across the system. Stressed assets — the sum of restructured loans and non-performing assets — rose to 11.3% in September 2015 from 10.7% last year, RBI data showed. However, analysts say the stress is far higher if one takes into consideration exposures that are classified as ‘standard’ but could turn sub-standard, such as those where a strategic debt restructuring (SDR) is being considered.

“There are likely to be incremental additions to stressed assets from SDR assets when the 18-month window expires. We believe the RBI’s recent view of clearing the banking system’s bad assets by March 2017 should lead to higher provisions in the near term,” Deutsche Bank wrote in a recent report.

If RBI asks banks to improve their coverage ratios, by say, 70%, it would lead to an increase in provisions of 0.5-2% of total advances across banks. Private banks would see an increase in credit costs of 40-50bps, while PSU banks are under-provided and hence would see their credit cost increase by 100-200bps.

As such, analysts estimate a proper clean-up could cost the banking sector anywhere between R50,000-60,000 crore in provisions by March 2017. Even as the government has said it is committed to capitalising banks — it has promised R70,000 crore in tranches by FY19 in the Indradhanush programme — the amount could fall short of the required R1.8 lakh crore to meet Basel III guidelines. While some part of the balance can be raised as bonds, it’s hard to see banks being able to raise capital from the capital market.

Given the increase in slippages reported by private players like ICICI Bank and Axis Bank for the October-December quarter, the deterioration in the asset portfolio of state-owned banks is expected to be worse. Axis Bank reported an increase in gross NPAs to R5,724 crore in Q3FY16 from R4,451 crore in the previous quarter. Although both ICICI Bank and Axis Bank have seen a drop in their market values since their Q3 results by 14% and 3% respectively, they currently trade at about one to two times their forward book values.

ICICI Bank’s slippages in Q3FY16 nearly trebled to R6,544 q-o-q, two thirds of which was on account of the asset reclassification directive of RBI. Total provision stood at R2,844 crore compared to R942 crore in Q2FY16. The lender indicated a similar level of slippages might be seen in the three months to March, 2016.

In FY15, private banks in aggregate turned more profitable than public lenders; in H1FY16, the collective profit of 25 state-owned banks fell 20% y-o-y to R16,615 crore. The gross non- performing assets, at the end of September, were R3.1 lakh crore, up 30% over September, 2014.

RBI has assured banks it is trying to identify non-recognisable capital, such as undervalued assets, already on bank balance sheets and could allow some of these to count as capital under Basel norms. RBI governor Raghuram Rajan recently said finance minister Arun Jaitley has indicated he will support the public sector banks (PSBs) with capital infusions as needed. “In sum, we believe enough capital is available,” the governor observed.

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