Mumbai: Shares of public sector banks fell on Monday after disappointing earnings posted by six mid-sized and large public sector banks on Friday. Each of these banks reported a continued increase in bad loans and provisions against loans, leading to a severe hit on profitability.
Shares of Bank of Baroda fell 8.23%, the most since 24 August 2015, Union Bank of India 5.91%, State Bank of India 4.22%, Allahabad Bank 3.43%, Canara Bank 4.34%, Punjab National Bank fell 3.42%, Bank of India 2.98%, Central Bank of India 2.11%, Dena Bank 3.91%, Syndicate Bank 4.33% and those of Andhra Bank dropped 2.47%.
The BSE Bankex index fell 0.04%, while the Nifty PSU Bank Index fell 4.78%.
India’s benchmark Sensex index gained 0.64% to 25,653.23 points.
On Friday, Bank of Baroda, Uco Bank, Central Bank of India, Allahabad Bank and Dena Bank reported a loss of ₹ 3,230.14 crore, ₹ 1,715.16 crore, ₹ 898.04 crore, ₹ 581.13 crore and ₹ 326.38 crore, respectively. Union Bank of India reported a sharp fall in profit. A number of these banks reported earnings after markets closed on Friday.
The pain may have been more severe if it wasn’t for a write-back of tax credits that most banks used to ease the pressure from higher provisions needed to cover the loans classified as non-performing assets (NPAs).
“Earnings for banks are expected to be weak. We don’t expect them to get any better over the last quarter. All banks need to recognize the other half of NPAs as per the asset quality review exercise of the Reserve Bank of India (RBI). There has been some relaxation provided by RBI, but that’s unlikely to be material for a majority of banks," said Niranjan Karfa, equities analyst at Jefferies, on 7 May.
“More importantly, while the peak stress may not be too far ahead, higher recognition of NPAs will continue to result in interest reversals, weakening the net interest margin and therefore the topline. Recoveries, if any, will be largely backdated," he added.
Religare Institutional Research, Jefferies and Reliance Securities have downgraded Bank of Baroda and reduced the target price on it. Religare has a sell rating on Bank of Baroda with a price target reduced by 25.9% to ₹ 115 a share, while Jefferies has downgraded its rating on the stock to ‘hold’ from ‘buy’ and cut its target price to ₹ 140 from ₹ 155 earlier.
Bank shares were also hit by higher-than-expected inflation reported for April. Consumer price inflation rose to 5.39% in April compared to 4.83%. This had prompted concerns that further rate cuts from the RBI may not be forthcoming.
“With underlying inflation showing no signs of moderating and upside risks from the seventh commission pay hikes in the offing, we expect the RBI to stay on hold until end-2016. Instead, more liquidity provisions will remain the primary channel of policy accommodation," said Nomura Research, in a note to its investors on Monday.