Mumbai/New Delhi: Investors received a scary glimpse into the deterioration of asset quality at India’s banks when the first lot of four state-owned lenders reported their third-quarter earnings on Tuesday.

Three—Central Bank of India, Dena Bank and Allahabad Bank—posted a net loss and Punjab National Bank’s (PNB’s) net profit plummeted 93% in the three months ended 31 December from a year ago.

All reported a surge in bad loans and provisions to cover the risk of default after the Reserve Bank of India (RBI), following an extensive asset-quality review, directed banks to reclassify loans and set aside more money against stressed assets.

“The biggest worry is that the worst may not be over. Some banks have indicated that the pain will continue in the March-ended quarter as well as they have not taken the entire hit based on the RBI’s review," said Siddharth Purohit, a senior researcher at Angel Broking Pvt. Ltd.

Angel Broking had been expecting bad numbers “but in some cases the earnings have been worse than expected", he added. “Slippages (good loans turning bad) have been high and except for the tax write-backs, the loss may have been worse in the case of some banks."

RBI has set banks a deadline of March 2017 by which time it expects banks to recognize stressed assets and make adequate provisions to cover them.

In the December and March quarters, banks will reclassify assets that are visibly stressed but have escaped the tag of non-performing assets (NPAs) for technical reasons.

In subsequent quarters, banks have been asked to pro-actively set aside money against assets showing signs of stress.

Overall stressed assets, including restructured loans, in the banking sector made up 11.3% of outstanding loans as of September 2015.

RBI had been concerned that some banks were delaying recognition of NPAs, which necessitated the asset quality review.

It’s the impact of this review which is showing up in the December quarter earnings.

PNB, the fourth-largest state-owned lender, said third-quarter net profit tumbled to 51 crore from 774 crore in the year-ago period, as provisions more than doubled to 3,375 crore from 1,467 crore.

Provisions surged as loans classified as bad loans ballooned. Gross NPAs at the bank surged to 8.47% of the loan book in the December quarter from 5.97% a year ago.

Gross bad loans jumped 37.6% between the September and the December quarters, reflecting the impact of RBI’s asset quality review. The bank’s management warned of a possible increase in subsequent quarters.

“Industry has been going through tough times. PNB has been one of the major lenders to big industries which are struggling at present and that affected the asset quality," said Usha Ananthasubramanian, managing director and chief executive officer of PNB, adding that the “surgery" is not over.

Large accounts in the steel, infrastructure and power sectors were the main reason for high slippages at PNB.

The bank was saved from reporting a loss after it was able to write back 909 crore of provisions made for income tax. Typically, the bank does any write-back only in the fourth quarter, but was asked by its auditor to do so early this time, Ananthasubramanian said.

The bank will also need more capital from the government and has asked for it. “We are hopeful we will get it," she added.

Shares of PNB fell 6.9% to 87.85 on the BSE on Tuesday, a day the benchmark Sensex shed 1.1% to close at 24,020 points.

The other three state-run banks that reported earnings posted heavy losses because of bad-loan provisions, which one analyst said showed that banks hadn’t set aside sufficient money to cover the risk of default in previous quarters.

“The quantum of under-provisioning is not surprising," said Ananda Bhoumik, managing director and chief analytical officer at India Ratings & Research Pvt. Ltd. “What probably caught banks unaware is the urgency with which RBI pushed for making adequate provisioning. We may see a couple more of such quarters before it stabilizes."

Central Bank of India reported a net loss of 836.62 crore for the quarter ended 31 December compared with a net profit of 138 crore in the year-ago quarter.

The state-owned bank’s provisions more than doubled to 1,499 crore from 699 crore a year ago.

Gross NPAs rose 31.5% to 17,564 crore from 13,358 crore in the second quarter. Gross NPAs made up 8.95% of gross advances as of 31 December.

Dena Bank reported a net loss of 663 crore for the quarter to 31 December compared with a net profit of 76.56 crore a year ago. The bank’s provisions for the quarter quadrupled to 967 crore from 241 crore a year ago.

The higher provisions came along with a 50% jump in loans classified as NPAs.

Gross NPAs rose to 7,916 crore from 5,282.62 crore in the second quarter. Gross NPA ratio was 9.85% as of 31 December.

“In the current quarter about 807 crore worth of additional provisions happened because of higher slippages," said Ashwani Kumar, chairman and managing director, Dena Bank. “We are expecting the fourth-quarter provisions and slippages to be lower than the December quarter. The gross NPA should remain at this level."

He expects asset quality to improve in the financial year starting on 1 April.

Allahabad Bank did not fare much better. It reported a net loss of 486.14 crore for the quarter ended 31 December. The bank had reported a profit of 177 crore a year ago.

The bank’s provisions for the quarter doubled to 1,208 crore from 644 crore a year ago.

Gross NPAs in the third quarter rose 23% to 9,802 crore from 7,985.75 crore n the second quarter. Gross NPAs made up 6.4% of gross advances as of 31 December.

Dena Bank shares fell 12.1% to 31.25 on the BSE. Allahabad Bank’s shares closed down 3.23% at 51.

Most state-owned banks will report earnings over the course of the next four days and analysts are concerned that many will be in the red, which could mean further losses for their already beaten down shares.

The Nifty PSU bank index, a grouping of state owned bank shares, has fallen 33% since the start of December on expectations that these banks will report poor earnings.

In comparison, the BSE Sensex has fallen 8% over the same period.

Individual stocks may fall further if earnings are worse than expected, said Purohit of Angel Broking.

“Stock reaction will be specific to individual banks but markets would be more comfortable with banks that are not deferring the problem," he said.

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