Q3 results: SBI’s bad debt woes a wake-up call to the govt

Investors may have to wait for the bad loan mess to get cleared for the shares to bottom out


Bringing the bad loans to light is definitely a good step, but the market needs to be assured that the government will fix the problem speedily. Photo: Pradeep Gaur/Mint
Bringing the bad loans to light is definitely a good step, but the market needs to be assured that the government will fix the problem speedily. Photo: Pradeep Gaur/Mint

Enough is enough. In a speech at the Confederation of Indian Industry banking summit on Thursday, the Reserve Bank of India (RBI) governor Raghuram Rajan tried to do some damage control after the bloodletting in bank stocks by assuring that the government will support the banks with more capital infusion.

The Nifty PSU Bank index has plummeted to its lowest level in over two years on worries about bad loans. Banks have reported horrendous earnings as they make huge provisions to clean up their balance sheets. Rating agencies have raised the prospect of downgrading the banks. Apart from not having the capital to lend, which banker, faced with massive bad loans, is going to summon up the courage for fresh lending?

The malaise now threatens to affect the economy. In these circumstances, surely the government needs to state upfront what plans it has to recapitalize banks? Sure, bringing the bad loans to light is definitely a good step, but the market needs to be assured that the government will fix the problem speedily.

That’s not all. “We believe provisioning requirement of public sector banks will increase further and render their pre-provisioning profits inadequate, leading to significant deterioration in earnings profile,” says Crisil Ratings. The pain is not going to end anytime soon and Rajan said it may take up to March 2017 for fully cleaning up of bank books. That will hang like a Damocles’s sword over bank valuations.

On Thursday, India’s largest bank, State Bank of India (SBI), announced that its net profit plunged by 62% to Rs.1,115 crore in the three months ended December. Loan loss provisions jumped by over 50% to Rs.7,645 crore as the bank had to set money aside for troubled loans.

Fresh slippages, or loans turning bad, touched an all-time high of Rs.20,692 crore for SBI. Around three-fourths of these slippages were because of RBI’s asset quality review. Most of the bad loans were from the steel, textile and power sectors.

Bad loans are far from reaching a peak. SBI chairperson Arundhati Bhattacharya said at the press conference that she expects similar numbers in terms of asset quality in the March quarter as well.

Gross bad loan ratio at SBI increased to 5.1% in end-December from 4.15% at the end of September. Overall stressed assets, which include troubled loans and restructured assets, climbed to 8.5% from around 8% in the September quarter. But the percentages do not show the enormity of the problem—the total restructured assets in end-December amounted to Rs.121,389 crore.

Also, the troubled assets do not take into account loans worth Rs.33,441 crore, half of which have been classified under the 5/25 scheme and the rest under strategic debt restructuring so far in FY16, which is worrisome, said Vaibhav Agrawal, vice-president-research, Angel Broking.

Weakening asset quality weighed on net interest margins which narrowed to 2.93%, from around 3.12% in September. Interest write-back on restructured accounts and a 70 basis points cut in the base rate weighed on SBI’s margins. A basis point is 0.01%.

Unlike mid-sized state-run lenders, SBI is adequately buffered. Its net bad loans are just 27% of its net worth. It will have enough head room in case of default as the capital ratio is at around 12.5% and equity fund-raising of around Rs.15,000 crore in FY17 will further ensure that it is well capitalized.

SBI shares have halved in the past year and are trading at 0.7 times one-year forward book value. Investors may have to wait for the bad loan mess to get cleared for the shares to bottom out.

The writer does not own shares in the above-mentioned companies.

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