Banks: Past karma and new headwinds to rob banks’ FY18 profits
Years of undisciplined pursuit of top line growth by public sector banks has now come back to erode their profits for the second straight year.
The December quarter offered no respite to banks but seemed to show that some of their worst nightmares have come true.
The stock of stressed assets didn’t rise as most of the fresh slippages stemmed from existing restructured accounts.
That meant that borrowers aren’t paying up even after their loan is restructured to give them either more time or lower interest.
The second nightmare was the bond market, where yields surged. Indian banks are captive investors of bonds and they have to mark to market a large portion of their bond portfolio.
Rising yields wreaked havoc, making them set aside more profits for such a hit.
Even as banks had to face these headwinds, the prospect of recoveries looked bleak and the pace of new borrowers turning errant didn’t abate.
Aggregate provisions surged 75% from a year ago for all banks, while public sector lenders saw their provisions surge 94%.
The fact that only 38% of this increase came from the 11 banks under the prompt corrective action (PCA) plan shows that the stronger ones have also been affected.
PCA is akin to being in the intensive care unit, whereby the Reserve Bank of India (RBI) mandates fixing the balance sheet and restricts growth. Even stalwart private banks such as ICICI Bank Ltd and HDFC Bank Ltd saw their provisions surge from the year-ago period.
Provisions will rise more in the fourth quarter, following the tightening of bad loan recognition norms and the end of various schemes by RBI, according to analysts.
This has come as a blow to many lenders, who had hoped for some relief in the fourth quarter of the current financial year.
As banks set aside more profits for provisions, their revenue from core operations continued to deteriorate.
Indeed, optically, loan growth was impressive for many banks because the December quarter in 2016 witnessed the demonetisation event.
The cash purge had crippled loan off take at that time and, therefore, loan growth percentages should be heavily discounted.
If one adjusts for demonetisation, then loan growth was not worth writing home about.
There is no light visible yet at the end of the tunnel for public sector banks.
In 2015-16, public sector banks had reported a staggering loss of more than Rs18,000 crore after the central bank told them to provide for all shaky accounts. Two years hence, there is no change in the metrics.
Collectively, listed Indian banks reported a loss of Rs6,943 crore, of which a massive loss of Rs18,097 crore by public sector lenders was partly offset by private banks making an aggregate profit of Rs11,154 crore.
Decaying loans, hostile bond markets, shrinking loan growth and now the spectre of fraud make for a painful year. The fact that shares of public sector lenders have been pummelled by about 20% in the past three months shows that investors are aware of the pain.
But much of this has been after the fraud came to light at Punjab National Bank, or PNB.
The fraud has forced analysts to cut earnings estimates of lenders. Two years of bleeding has shown lenders what hiding decayed loans brings. The fraud has dealt a big blow to investor sentiment.