Canara Bank’s asset quality: optically better but risks abound
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South-based public sector lender Canara Bank reported an improvement in key asset quality metrics, something that should bring relief to investors, pummelled by deteriorating asset quality over the past five quarters.
Its gross non-performing assets (NPAs) ratio slipped 34 basis points sequentially to 9.63% of total advances in the fourth quarter, while net NPA ratio fell to 6.33%. Before we argue that ratios tend to skew things, the lender reported a net reduction in its bad loan stock as well from the December quarter. Gross NPAs reduced by Rs137 crore sequentially.
But this is not enough to cut Canara Bank some slack. Fresh slippages have soared, which means that more loans are decaying. Its upgrades and recoveries are minuscule compared with slippages, and this means the rate of decaying is faster.
Large borrowers are the culprit, accounting for 47% of fresh slippages. However, drought conditions in Tamil Nadu and weak crop outlook in other states seem to have hit the lender hard as well. Slippages from agriculture rose and were 20% of total slippages.
One more metric that damns Canara Bank’s asset quality is the surge in write-offs in the fourth quarter. The lender wrote off loans worth Rs2,466 crore from its balance sheet, a 191% surge from the previous quarter.
If we dig deeper, the bank’s doubtful assets are up 53% from the previous quarter to an outstanding Rs26,186 crore. Doubtful assets are the weakest form of NPAs and require a minimum 25% of provisioning. If these assets are not resolved for three years, the bank will have to provide 100%.
What investors will also need to watch for is the restructured loan stock of Canara Bank. While gross NPAs have risen 8% from a year ago, the restructured book has reduced only by 7.16%. This could mean a potential risk if slippages from the restructured book are waiting to happen, especially since 36% of it belongs to the stressed infrastructure firms.
A tepid loan growth of around 5% and the resultant muted growth in core income spell trouble for the lender in the coming quarters. Its net profit growth is entirely from trading gains, and these are fickle.
The fact that Canara Bank’s stock was unmoved by the quarterly results indicates that investors are already having niggling worries over asset quality.