The December quarter results of banks show that the bad loan wound has not only festered for many lenders but that banks have gotten the diagnosis incorrect in many cases. What investors need to ask is whether banks were the victim of circumstances because of demonetisation or did they not learn their lesson of judicious provisioning.
These are five ratios that indicate that banks still have a long way to go to put their house in order:
Gross non-performing assets: Nearly all banks showed a rise in the GNPA ratio for December from a year ago period, which essentially means that bad loans have been piling up at pretty much the same pace. Granted, the sharp deceleration of credit growth for most public sector banks would somewhat bloat this ratio for them. However, may smaller banks not just showed shrinkage in their loan book but also a larger part of the book going bad.
For the 38 listed banks put together, the gross bad loan stock rose 59% to a massive Rs6.82 trillion in December. Eighteen of the twenty four listed public sector banks have 10% of their loan book as bad. Not only do banks have a gargantuan task of providing further as these NPAs age but they have to also push for quicker resolution lest this ratio turns uglier. Needless to say big players may succeed more than smaller lenders in this.
Net NPA: On a net basis too, banks have shown an increase in bad loan ratios. A rising net bad loan ratio simply means that past bad loans have not turned around even as new ones are added. Most banks have reported dismal recoveries and upgrades in accounts. Baring three lenders, all other banks reported a rise in net NPA ratio. Indian Overseas Bank had the highest ratio at 14.32%, only one of the signals that the bank is in deep trouble. The net NPA stock for the 38 banks showed a rise of 57% in December from a year ago.
Stressed asset ratio: In order to build some credibility, many banks had announced a watch list of accounts that has the highest propensity to go bad. But quarterly results have shown that not everyone made the right diagnosis and pain can emerge outside the list too. Stressed assets are a combination of gross NPAs and restructured standard assets.
ICICI Bank, HDFC Bank and even State Bank of India didn’t see a rise in this ratio from a year ago. Smaller lenders such as UCO Bank, United Bank of India, Vijaya Bank and even Oriental Bank of Commerce all showed a rise and have ratios in the high teens. Of the 38 lenders, this ratio was readily available only for 17 banks.
Tier-I capital ratio: Many lenders saw a disastrous dip in their common equity Tier-I capital and total Tier-I capital following the colossal provisioning done in the wake of the asset quality review (AQR) last year. A shrinking loan book has meant that capital was conserved but not every bank has been lucky. While Andhra Bank has fallen below the mandated 7% ratio, many others are perilously close to slipping too.
What this could mean is banks would continue to shrink their loan book as the government has not added to the recommended Rs10,000 crore recapitalisation for all lenders it owns.
Provision coverage ratio: Have all banks learned to be careful after burning their fingers last year? If the fall in this ratio is an indication, lenders are still swimming naked in the bad loan pool. Not all banks have disclosed this ratio. Among private lenders, Axis Bank showed a sharp fall in PCR while most public sector banks showed an improvement, albeit small.
An improved PCR in their case was merely because of a smaller accretion of bad loans rather than cautious provisioning. Some lenders such as Bank of Baroda have indeed provided proactively in the previous quarters.