Asset quality – the pain hasn’t disappeared yet for PSU Banks

Zee Research Group/ Delhi

While the Prime Minister`s Economic Advisory Council has suggested the government to dilute its stake in public sector (PSU) banks to 51 percent, PSU banks have continued to show the asset quality deterioration in second quarter of the current fiscal (Q2FY14). However, experts believe that asset quality will improve once economy revives.

A Zee Research Group (ZRG) analysis reveals that most of the PSU banks have witnessed increase in NPAs during the quarter under review as against the first quarter of the current fiscal (Q1FY14). For instance, in case of Punjab National Bank (PNB), the gross and net NPA (NNPA) as a percent of advances has increased by 30 basis points (bps) and 9 bps respectively on sequential basis (QoQ). In absolute terms, while gross NPAs (GNPA) rose by 9.51 percent to Rs 16,526.26 crore, net NPAs have increased by 6 percent to Rs 9,609 crore.

Furthermore, GNPA and NNPA of United Bank of India has increased by 193 bps QoQ and 153 bps QoQ to 7.52 percent and 5.39 percent respectively. Moreover, GNPA and NNPA of Corporation Bank has increased by 80 bps QoQ and 55 bps QoQ to 3.17 percent and 2.2 percent respectively. Even, GNPA and NNPA of SBI has increased by 8 bps QoQ and 8 bps QoQ to 5.64 percent and 2.91 percent respectively.

Concurring with the above facts, Vaibhav Agrawal, VP Banking, Research at Angel Broking, opined, “Asset quality is still a concern for PSU banks. The broad trend is that most of the banks have shown deterioration in asset quality even in the latest reported quarter (Q2FY14).”

Likewise, Rajiv Mehta, research Analyst at India Infoline, who closely tracks the banking sector, averred, “Asset quality continues to deteriorate in Q2FY14. However, the pace of deterioration has slightly come off.”

However, there are some PSU banks like Allahabad Bank, Bank of India, Canara Bank which have witnessed an improvement in their net NPA ratios. NNPA of Allahabad Bank has decreased by 4 bps QoQ to 3.83 percent. Even, NNPA of Bank of India has decreased by 25 bps QoQ to 1.85 percent. Similarly, NNPA of Canara Bank has decreased by 18 bps QoQ to 2.3 percent.

Reasoning out the improvement seen in the asset quality of these banks (Allahabad Bank, Bank of India), Agrawal at Angel Broking said, “They (Allahabad Bank, Bank of India) saw an improvement in NPA ratios as they sold large chunk of their NPAs to asset-reconstruction companies (ARCs).”

“This (sale to ARCs) trend could pick up in the coming quarters as lots of loans are expected to become NPAs (large corporate loans),” he added.

Commenting on the outlook related to NPAs, Mehta at India Infoline said, “The asset quality concerns for the PSU banks are expected to persist for the next four quarters. As there is an overall stress in the economy NPAs may rise.”

Referring to the structural challenges faced by the PSU banks, Agrawal said, “NPAs may not recover sharply. There is a shortage of capital. Furthermore, owing to intense competition, they are losing market share to the private sector banks.”

“Phased dilution of government stake in PSU banks can only happen over a period of time. As of now, it seems that the government is going to increase its stake in them because these banks need capital infusion, “he added.