Friday, January 30, 2015

Poor BoB, Vijaya earnings show stress on public banks, mirror true state of economy

Mumbai: Shares of Bank of Baroda (BoB) plunged as much as 14 percent to Rs 187.90 on Friday after the lender showed a 68 percent dip in its net profit for the quarter ended 30 December. BoB net profit fell to Rs 334 crore from Rs 1,045 crore in the year ago quarter. 

The main reason for such a sharp fall in the net profit figure is a substantial rise in the provision made on bad loans and a major surge in the tax expenses due to the Dubai income tax levy, as explained by BoB officials in the post result press conference.

While the tax expenses are more of one-off hit, what worried the investors more was the sharp deterioration in the asset quality of the bank, which has more or less maintained a good asset quality trend in the past, and the subsequent rise in its provisions. This is something that certainly warrants high caution. 

As Firstpost has noted before, state-run banks continue to feel the pinch of weak corporate health in a faltering economy, also a reflection of the true state of progress of economic activity on the ground. 

BoB’s gross bad loans, for the December quarter, rose to Rs 15,452 crore in the December quarter, up 18 percent, from Rs 11,925 crore in the year ago quarter and Rs 13,057 crore in the preceding quarter. In percentage terms, gross NPAs now constitute 3.85 percent of the total loans of the bank compared with 3.32 percent in the corresponding quarter last year.

The worrying part is that the incremental slippage number doesn’t show any improving trend. In the quarter alone, BoB registered Rs 3,042 crore fresh slippages as compared with Rs 1,758 crore in the preceding quarter.

The bank wrote off Rs 328 crore in the December quarter and made a recovery of Rs 238 crore. Tax expenses made in Dubai stood at Rs 375 crore that also contributed to the overall decline in the profit numbers.

BoB's loan growth trend has remained muted in a slow growing economy, where new projects are yet to come up and the existing stalled ones are still waiting for clearances. 

One of the reasons for the high bad loan numbers is the new norms from the Reserve Bank of India regulations on the bad loan recognition. 

In the past, a loan account become bad only when there are no payments for a period of three months. As against this, banks now need to recognise stress on their books fro individual accounts much earlier (if repayments are overdue between (31-60 days) when they see early signs of repayment difficulties. 

Due to this, banks prefer to recognize bad loans earlier, instead of postponing it. This has probably contributed to the sharp decline in BoB numbers. 

According to BoB officials, the bad loan additions are likely to continue for one or two quarters more.

Even other state-run most state-run banks, which have reported their numbers so far, have logged a visible worsening of their accounts underlining the persisting stress on the economy.

Vijaya Bank, another state-run bank that reported earnings on Friday, too showed a significant rise in its bad loan levels to 2.92 percent of total loans from 1.88 percent in the preceding quarter. The bank saw fresh slippages of Rs 728 crore in the December quarter as against recovery of Rs 500 crore. 

Total stressed assets of the banks, which include restructured loans, stands about 8 percent. 

Early this week, state-run, Union Bank of India too reported a 13 percent drop in its net profit to Rs 302 crore in the quarter on a year-on-year basis on account of a substantial rise in the provisions made on bad loans. 

Clearly, state-run banks haven't been able to break the jinx of bad loan addition just yet. As compared with this, private sector banks have reported good set of numbers. 

The current situation of bad loan addition on the books of state-run banks is unlikely to get better in the foreseeable future. A significant chunk of loans given to infrastructure companies and small and medium sized firms continue to remain under stress.

Even one assumes that the economic recovery happens from now, there will be a lag effect for this to get translated into corporate health and good cash flows. The persisting stress is quite visible both on the bad loans and restructured loans levels of banks. Together, such stressed assets constitute over 10 per cent of the total loans given by banks. 

The only silver lining is the relatively lower number of fresh references received for loan recasts in the December quarter. If the recovery takes firm roots in the economy sooner than expected, can help improve the corporate health and the stress level can come down.

There haven’t been any significant investments on the ground till this point despite the improving investor sentiments. For now, state-run banks continue to be under stress, which would add to their capital burden and hamper profitability.

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