Banking on three quarters and a prayer
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Listed Indian banks have had their worst three quarters in history with these past nine months culminating in a massive drop of almost 30% in profit, a doubling of the bad loan pile and additional trouble of capital depletion for public sector banks. But have banks learnt their lesson? Have they wised up in the nine months and provided for every rupee they learnt had turned toxic?
The answer is not a straight and comforting yes. Two numbers indicate that banks could still be swimming naked in the bad loan pool. One is the provisions of banks towards bad loans and second is the provision coverage ratio (PCR). Of the 39 listed banks that have declared results for the September quarter (Jammu and Kashmir Bank is yet to release its numbers), 30 lenders saw their PCR drop sharply from a year ago. Axis Bank saw the biggest drop in the ratio to 59% in the September quarter from 78% a year ago. The worst of the lot were South Indian Bank and Punjab and Sind Bank, both having a ratio of just 46%.
PCR is a measure of funds kept aside by a bank to cover bad loans. A higher PCR means the bank is protecting itself better against its bad loans. It is clear that lenders are yet to make the required prudent provisions against bad loans. This is frightening for the outlook on profitability for banks in the coming quarters. As bad loans age and more loans slip every quarter, provisions are unlikely to come down. If the momentum of provisioning remains the same, loss-making banks may not be able to swing to profit and those making profits are unlikely to increase the growth in their earnings.
For the sector as a whole, provisions rose by 80% in the September quarter but the bad loan stockpile bloated by a greater 105% on a net basis. To avoid painting every bank with the same brush, provisions rose at a faster pace than bad loan accretion in 16 banks.
Now, have investors taken note of the worsening coverage ratio? One look at the price-to-book value multiple of the 30 banks that saw a sharp drop in PCR shows that the Street is yet to completely wake up to this grim picture. These lenders haven’t seen a big erosion in their multiples. Fifteen of these lenders saw their share price rise over the last nine months, with nine of them climbing more than 5%.
Unless banks buckle up, their profits don’t stand a chance in the coming quarters.