Post the Reserve Bank of India’s (RBI’s) directive to banks to clearly provide for all risky exposures by March, there has been a sharp drop in stock prices of public sector banks (PSBs). Share prices of PSBs have declined between 11% and 41%. Disappointing Q3FY16 numbers have also weighed on their performance. Nine state-owned lenders have posted collective loss of nearly R11,000 crore during the quarter ended December 2015.
With below-estimate performance and a sharp decline in profits, PSBs are trading below their estimated book value amid the ongoing market correction. The stocks may not really be cheap as they appear since cleaner balance sheets could attract more provisioning and write-offs as well.
According to the India financial report by Credit Suisse, “Indian banks NPLs jumped an unprecedented 30% in 3Q following the RBI audit and are likely to move-up further to 6.6% of loans by March as most banks deferred the impact over two quarters. Provision coverage has also slipped to 43%. Un-provided NPAs for most PSBs are now 30–75% of their capital and un-provided problem.
The RBI audit revealed significant under-recognition of NPAs. Operating performance also deteriorated for the corporate lenders, in particular the PSBs. Most have been unable to grow their loan books in the past nine months, and with NIMs under pressure, pre-provision profitability has weakened further.”