Bad loan clean-up leaves big banks in the red

No number seems too big or outlandish when it comes to state-owned banks reporting their quarterly results. The gravity of the bad-loan problem has understandably kept market expectations at a bare minimum. What else could explain the 3 per cent rally in the stock of Punjab National Bank on Wednesday, despite the bank reporting a record loss of over ₹5,300 crore. While PNB has reported the largest loss thus far in India’s banking history, there are other public sector banks that have also reported substantial losses — give or take a few thousand crores. Bank of Baroda, for instance, reported a loss of about ₹3,200 crore, and Syndicate Bank around ₹2,100 crore during the March quarter.

What has led to such colossal losses? The RBI’s asset quality review that forced banks to recognise certain loans as non-performing assets (NPAs) in the December and March quarters has led to a free fall in banks’ earnings. Many of these stressed loans that were not classified as NPAs earlier eluded the requisite 15 per cent provisioning.

Though over the last two years banks’ earnings have been impacted by slow economic growth, the bigger factor has been the RBI no longer being in a mood for regulatory forbearance.

Increase in bad loans impacts banks’ earnings in two ways. One, banks have to reverse the interest income they have recognised on such loans. And, two, they have to set aside additional provision for these loans. While public sector banks’ core net interest income grew by 6 per cent in 2014-15, it has been flat in FY16. And with bad loans doubling, many banks have reported huge losses.

PNB’s bad loans, for instance, have shot up to 12.9 per cent of the loan book, while provisioning has trebled over the last year. Given the weak core performance owing to muted credit growth and fall in margins, the ₹2,700-odd crore core net interest income has grossly fallen short of the ₹11,300 crore provisioning that PNB had to make in the March quarter. But for a tax write-back of about ₹1,900 crore, the loss would have been steeper.

Bank of Baroda reported its second consecutive quarterly loss in the March quarter. The bank’s bad loans shot up from 3.7 per cent of the loan book as on March 2015 to 9.9 per cent in March 2016. The bank ended the year with a loss of about ₹5,400 crore, as provision for bad loans trebled. It needs to be seen if SBI too reports losses for the March quarter.

The review of stressed assets has not spared even private banks such as Axis Bank and ICICI Bank. The latter added about ₹7,000 crore to the bad-loan book in the March quarter, its earnings falling sharply by 76 per cent over the same quarter last year.

Over the past two to three years, public sector bank stocks have been hammered, due to weak earnings and no let up in asset quality pressure. This may be one reason why the market now seems to have shrugged off the huge losses posted by these banks. Also, the large clean-up in balance sheets in the last few quarters reduces the risk of sharp deterioration in asset quality in the coming periods.