If the reported quarterly earnings of half a dozen public sector banks last week are any indication, the sickness among government-owned lenders may have reached its last stage.
Six public sector banks that have a 20% share in the assets of all public sector lenders reported a cumulative loss of a staggering Rs15,961 crore for the fourth quarter of fiscal year 2018 (FY18), after they had to provide Rs27,153 crore towards bad loans.
Of the six, four lenders are already under the scheme of Prompt Corrective Action (PCA) of the Reserve Bank of India (RBI), which is essentially akin to being in an intensive care unit.
Dena Bank, which was already in a precarious state, got a body blow with the regulator banning it from sanctioning any fresh loans unless its balance sheet is fixed. In other words, anyone walking into a Dena Bank branch for a fresh loan sanction will be turned back. No wonder, the bank’s shares fell 6% in reaction to this, as future earnings from the core lending business are as good as non-existent. The smallest public sector lender has been under PCA for a little over three quarters now, during which its loan book has been stagnant. More than 22% of its loan book is toxic and its capital adequacy ratio is just teetering at the minimum regulatory level.
The others under PCA, such as UCO Bank, Allahabad Bank and Oriental Bank of Commerce, reported horrifying slippages and bad loan ratios as well.
Even the two lenders that are not under PCA reported an unexpected surge in slippages and provisions. For instance, Canara Bank reported a staggering Rs13,242 crore worth of slippages for the fourth quarter, which is higher than the slippages it reported for the entire FY17.
The source of the ugly asset quality is the removal of forbearance on restructured loans in February by RBI. Earlier, banks classified restructured loans as standard and thus escaped provisioning.
Therefore, the deterioration of asset quality could be one-time, given the hit from removal of forbearance. However, analysts are not optimistic for the coming quarters either. That is because many of the lenders have also reported weak core income growth.
“It is going to be challenging. The government and the RBI have put in place a framework and strengthened it. An immediate fillip can be only through faster and better resolution of accounts under IBC,” said Karthik Srinivasan, head of financial sector ratings at Icra Ltd. IBC stands for the Insolvency and Bankruptcy Code.
Indeed, for all practical purposes, the 11 public sector lenders under PCA have turned into zombies. Their loan book has shrunk due to a fall in large corporate loans and the only lending these banks have done is to the retail and agriculture sectors.
According to Srinivasan, expecting positive shareholder value from public sector banks could take at least a year. The stocks of the 11 public sector banks under PCA are trading at a deep discount to their estimated book value for FY20.
Canara Bank and Union Bank of India, which are not under PCA, are also trading at a discount to their estimated adjusted book value for FY20.