If fiscal 2015-16 was annus horribilis for Indian banks, the year to March seems to be no different.
Banks and their investors seem to be coming to terms with this as analysts have slashed their 2016-17 earnings per share (EPS) estimates for the Bankex by about 10% since demonetisation.
The third-quarter financial results of banks, particularly large corporate lenders, were as painful if not more than those of the previous quarters as bad loans continued to pile up.
The stock of gross non-performing assets (NPA) of listed banks is now a massive Rs7.1 trillion ($108 billion), a rise of 60% from a year ago.
Notwithstanding NPA war rooms such as that of Punjab National Bank or watch lists made public in the case of ICICI Bank Ltd and Axis Bank Ltd, the rate of bad loan accretion remained elevated.
To be fair, though, the slippage rate (good loans turning bad) slowed in the December quarter from the previous quarters.
Of course, setting aside money against the NPA stockpile was mandatory and while many banks cut corners (shown by the fall in their provision coverage ratio), some lenders continued to make higher provisioning.
Nevertheless, the cumulative provisioning of all listed banks fell 8% in the December quarter to Rs45,147 crore.
But recoveries and upgrades being unimpressive, this bad-loan pile will age and necessitate higher provisioning in the future, which explains the bearish outlook on the full-year earnings.
Analysts have understandably pencilled in a jump in credit costs for the current financial year.
If bad loans were the constant bugbear for banks, a new irritant that chipped away some of the fee income was the waiver of various charges on ATM, or automated teller machine, transactions and use of cards after the demonetisation of high-value bank notes.
Given the twin blows, one out of three public sector banks made losses while the cumulative profit of all listed private banks fell 14% from a year ago.
Even India’s most valuable bank, HDFC Bank Ltd, couldn’t go unscathed, and its profit growth fell to 15% for the third quarter from 20% in the second quarter.
That the earnings per share estimate of 2017-18 for the Bankex is also down 12% indicates that many feel the pain will persist longer.
But, ironically, the shares of banks, especially those of public sector lenders, have gained sharply even after many reported worsening asset quality metrics and reduction in their core business of lending.
These gains are largely on the back of hopes that the government and the Reserve Bank of India (RBI) would work out a decisive plan to tackle the bad loan problem.
While balance sheets do not seem to warrant current valuations, analysts believe that if a concrete plan for bad loan resolution emerges, corporate lenders such as ICICI Bank, Axis Bank and even State Bank of India, or SBI, could be re-rated.
“In our view, a joint private-government initiative may work, with the private sector providing the capital and expertise to manage the bad loans and the government’s legal backing to the PSUs (public sector undertakings) to enable them to make suitable ‘haircuts’ to bad loans,” Kotak Securities wrote in a note.