The non-performing assets (NPA) of PSU banks have risen in the first quarter of current fiscal following the Reserve Bank of India's diktat on system driven recognition of NPAs.

This has sent stock prices of several PSU banks downwards since July 28.

Bank of India is one such case and it is interesting to note that LIC added 2.06 per cent in Bank of India on July 28, to its already existing 7.16 per cent stake taking its total stake to 9.21 per cent.

Despite this, the Bank of India scrip hit its 52-week low on Wednesday, when it touched Rs 362 to a share.

Bank of India has been going down from Rs 397.75 to a share on July 28 to Rs.372.40 to a share on August 3 clocking a lower closing price every day.

“Earnings are likely to remain weak in the current fiscal year. While margins have mostly bottomed out, the bank is still likely to end FY12 about 40 bps lower than the FY11 level. Also, we believe asset quality woes will continue even after fully recognising system-based NPLs in Q2. Accordingly, continuing lower margins and higher credit costs has led us to cut our earnings estimates sharply by 25 per cent for FY12 and 21 per cent for FY-13,” says a HSBC latest report, which downgraded the stock to ‘neutral' from ‘overweight'.

The CNX PSU bank index from July 28 onwards mirrored the impact on the banks and lost 117 points, closing lower every day in the last five trading sessions to end at 3733 points on August 3.

There are huge concerns on asset quality, slowdown in business due to rising interest rates and hence an expectation of net interest margin (NIM) contraction, said analysts.

“Banks are expected to migrate to system driven NPA recognition for their entire portfolio of advances by September 30, 2011 and since Bank of India has a very high corpus of small ticket advances, we expect slippages (NPAs) to increase significantly even in the September quarter,” said a banking analyst of an MNC brokerage.

Experts said that a high rate of interest reversal in agricultural advances portfolios of PSU banks was an important contributor. Other sectors where advances have started going bad are power, infrastructure and aviation. “As interest rates increase, there are concerns that retail and SME loans could also go bad,” said Mr Dinesh Shukla, Banking Analyst – Sharekhan. “There would also be pressure on investment provisions with yields rising.”

Add to this, the government borrowing programme and the mark to market losses that banks book on their investment books, and you have a deadly combination, said experts.

Though brokerages are maintaining a neutral stance or downgrading PSU bank stocks, experts said that they are a good buy at these levels as the worst with respect to NPAs has already been factored in by the street.

> raghavendrarao.k@thehindu.co.in

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