The combined net loss of 20 public sector banks (PSB) stood at Rs 16,272.34 crore for the fourth quarter ended March 2016 as bad loans situation worsened. PSBs registered net profit of Rs 4,063.58 crore in the corresponding quarter a year ago.
Non-performing assets or bad loans in some cases have breached RBI’s tolerance level that could result in prompt corrective action. As per RBI directives, a prompt corrective action may be enforced in cases where gross NPA has crossed 10 per cent.
Punjab National Bank and Bank of Baroda together reported net loss of Rs 8,597 for the quarter under review against net profit of Rs 904.91 crore in the same quarter last year.
All other public sector banks also posted a fall in Q4 net profit on year-on-year (yoy) basis during Jan-March period.
Barring Central Bank of India (down 6.60 per cent), all other public sector banks had given negative return to investors since the beginning of the ongoing calendar year 2016. Share price of Oriental Bank of Commerce dipped the most — 45.20 per cent to Rs 79.05 on May 20 from Rs 144.25 on January 1. It was followed by Punjab National Bank (down 37.70 per cent), Bank of India (down 30.60 per cent), Dena Bank (down 30.40 per cent) and Union Bank of India (down 29.60 per cent.
Of late, Finance Ministry’s annual report said gross non-performing assets (GNPAs) of banks could soar to 6.9 per cent by March 2017 in a ‘severe stress scenario’. The gross NPA of the scheduled commercial banks, which was 5.14 per cent at the end of September 2015, may rise to 5.4 per cent by September 2016, it said quoting a RBI report.
State Bank of India is yet to announce its fourth quarterly results, which is scheduled on May 27.
With the help of brokerage reports we collate a list of 5 major public sector banks and guide you on whether to retain them in your portfolio or sell.
Punjab National Bank
Rating: Reduce (Nomura)
Current Market Price: Rs 73.35
Investment Rationale: Public sector lender PNB on May 18 reported a net loss of Rs 5,367.14 crore for the fourth quarter ended March 31 against net profit of Rs 306.56 crore in the corresponding period of the previous fiscal. As far as asset quality is concerned, Gross Non-Performing Assets (NPAs) rose to 12.90 per at the end of March, from 6.55 per cent a year ago. Net NPAs too jumped to 8.61 per cent as against 4.06 per cent.
According to Reliance Securities, asset quality stress would continue to persist along with lofty credit cost in next 5-6 quarters, which would keep PNB’s return on assets depressed at around 0.1-0.2 per cent and return on equities at 1-5 per cent over FY16-18E for which the brokerage house downwardly revise its earnings estimate by 7-51 per cent for FY17-18E. As sharp rise in incremental stressed asset formation in FY16 along with subdued operating performance will continue to dent PNB’s performance, Reliance Securities remained cautious on the stock and assign ‘Reduce’ recommendation on the stock with a downwardly revised target price of Rs 59.
Bank of Baroda
Rating: Buy (Edelweiss)
Current Market price: Rs 135.55
Investment Rationale: Bank of Baroda (BoB) reported Rs 3,230-crore net loss for the three months to March as it continued to bleed heavily under a huge pile of bad loans. Provisions zoomed nearly six-fold to Rs 6,857 crore in the March quarter from Rs 1,817 crore on the back of the gross NPA ratio moving up to 9.99 per cent from 3.72 per cent.
According to Edelweiss, Bank of Baroda’s Q4FY16 performance was marred by one-off provisions. Despite high credit costs, owing to business re-engineering (focus on granularity) BoB will still generate near-term RoE of 9-10 per cent. Considering valuations of 0.9 times FY18E P/BV even factoring in higher stress and strong capital position, Edelweiss maintained ‘Buy’ on Bank of Baroda with target price of Rs 170.
Rating: Reduce (Sharekhan)
Current Market Price: Rs 50.45
Investment Rationale: Public sector Allahabad Bank reported a net loss of Rs 581.13 crore for the last quarter ended March 2016 as it substantially raised the amount towards bad loans provisioning in accordance with RBI’s asset quality directives. The Kolkata-headquartered lender had made a net profit of Rs 202.63 crore in the January-March quarter of 2014-15.
The bank almost quadrupled the provisioning and contingencies amount to Rs 2,487.15 crore for the quarter ended March 2015-16, as against Rs 631.11 crore kept aside for the same period a year ago.
According to Sharekhan, Allahabad Bank continues to report weak performance on operational front as well as on the asset quality aspect. The book is expected to remain under stress owing to high exposure towards troubled sectors. The growth hereon would be coming in from the retail and priority sectors along with that marginal cost of funds-based lending rate (MCLR) regime would keep margins suppressed. The bank is also low on capital adequacy (tier-1 of 8.4 per cent) which increases the risk of equity dilution. The brokerage house has maintained ‘Reduce’ rating on the stock with an unchanged price target of Rs 44.
Union Bank of India
Rating: Buy (KR Choksey)
Current Market Price: Rs 105.70
Investment Rationale: Marred by weak operating profits and higher credit costs, Union Bank of India reported 78 per cent decline in PAT to Rs 96.10 crore. The iron and steel and infra exposures weighed down on asset quality with bank reporting higher slippages. As the clean-up exercise continues, the bank reported subdued loan growth for the quarter. While CASA mobilisation, margins uptick and capital augmentation is on the radar. KR Choksey Shares and Securities in a research note said, “We reckon the bank will continue to post better earnings ahead.” The brokerage house maintained ‘Buy’ with near term cautious outlook.
Rating: Dropping Coverage (ICICI Securities)
Investment Rationale: In last couple of years, Syndicate Bank too faced the brunt of the economic slowdown with a decline in margins to 2.1 per cent in FY15 compared to around 3 per cent in FY13. Asset quality pressure also emerged with GNPA surging to 3.7 per cent in Q1FY16 vs. nearly 2 per cent in FY13.
According to ICICI Securities, an anticipated moderation in credit offtake, low margins and continued asset quality stress delay an improvement in return ratios, hovering around 11 per cent RoE and 0.5 per cent RoA. “We drop coverage on the stock. Investors currently holding the stock may look at larger PSU banks like Bank of Baroda and private banks like Axis Bank and Yes Bank,” said ICICI Securities in a research report.