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Brickwork Ratings Expects PSU Banks GNPA to Breach 5.00% by March 2014

December 14, 2013 - Bangalore, Karnataka, India

Brickwork Ratings has analysed data pertaining to asset quality of 20 PSU banks and 13 Private sector banks which represents approximately 95% of gross banking credit as of Sept 2013. According to our analysis, the asset quality has weakened significantly with a sharp rise in absolute GNPAs and NNPAs in the past few years. The slippage ratio, (defined as additions to NPAs during the year as a percentage of the standard advances at the beginning of the year) showed considerable increase in FY11 to FY13 period. The asset quality trends of Private and PSU banks show completely different picture, hence we have not combined the two for the analysis.

PSU banks’ share in total credit is in the range of 75% to 80% since FY08; however their share in total banking NPA’s has grown from 71% in FY08 to 86% in FY13 and further to 90% as of Sept 13. This may be attributed to a combination of weak macroeconomic situation, lax credit policy/ appraisal of Banks which gave more good money to recover bad money, poor monitoring, procrastination in taking decision and action, and slow pace of recovery through legal processes. A review of the Top 20 NPAs and Top 20 Restructured Loans of the banks reveals that exposure to Power and Roads & Highways has significantly affected the asset quality of PSU Banks. This is the key distinguishing factor when we compare asset qualities of Public Sector banks from Private Banks who has lesser exposure to Infrastructure Sector.

Average Gross NPA numbers for PSU Banks have already crossed 4.00%

The average Gross NPA and Net NPA ratio for PSU banks stood at 4.21% and 2.70% for Sept 13, compared to 3.30% and 1.95% respectively in Sept 12. For private banks GNPA ratio was almost flat at 1.98% compared to 1.96% in Sept 12 whereas Net NPA ratio increased slightly to 0.69% in Sept 13 vs 0.55% in Sept 12. Out of 20 PSU banks studied, 9 banks had higher than average ratio with United Bank of India having the highest at 7.52% and Canara Bank, the lowest at 2.64%. In contrast, amongst the 13 private sector banks, only 4 banks had above average GNPA ratio with Karnataka Bank having the highest 3.59%. The lowest GNPA ratio was exhibited by Yes Bank at 0.28%. Further, the average provision coverage ratio for PSU banks has fallen considerably to 57.6% in Sept 13, compared to 63.4% as of Sept 12. Compared to this, average PCR for Private sector banks was flat at 75% for Sept 13. Moreover, this PCR (of PSB) is inclusive of technical write offs; when we look at Loan Loss Coverage Ratio i.e provisions made specifically for Gross NPA’s to arrive at Net NPA, the ratio is as low as 35% for PSU banks. For private sector banks the average ratio is 66%. It is desirable to take a long term view and improve the PCR to bring it to the prescribed 70% level though in the short term it will considerably hurt the profit of most PSU banks, especially keeping in view their weaker performance in Sept 13. The combination of Basel III requirements and weak earnings profile of most banks have lead to urgent necessity for increasing equity capital of most PSU banks. Government has recognised this and fixed target of Rs. 14000 Cr for recapitalisation of banks in FY14. However we believe in addition to this Banks may access Tier II bonds (under Basel III) as well as International funding is via perpetual bonds (non-equity Tier I) in coming few quarters. Since April I, 2013 approximately Rs. 4,000 Cr of Tier II debt complying with the Basel III guidelines was raised. In the present context the government also needs to rethink about Dividend Payout Policies of PSU Banks and let the units to retain the money to improve reserves. This will also help to shore up the core capital adequacy of Banks.

Restructuring as a tool has done higher damage to system

The above NPA should be seen in combination with the portfolio of restructured advances in the banks’ books. The Restructuring guidelines issued by RBI in 2008 were aimed at continuing the restructured assets, whether under CDR or otherwise, as Standard Assets, subject to certain norms. While this was well intended, given the global economic issues that prevailed at that time, banks have liberally used this tool to postpone recognising serious asset quality deterioration. As per RBI data, since FY09, the Restructured Advances in the total banking system has increased more than five times to Rs.
340000 Cr as on FY13. The ratio of Restructured Advances to total advances for banking system is around 6.2% as on FY13 and for PSU banks it is at 8.3%. It is also found that medium and large accounts make up over 90% of restructured accounts.

Thus, combining GNPA and Restructured Advances, the stressed asset (GNPA + Restructured Advances to Total Advances) ratio for 20 PSU Banks under consideration has risen to 11.45% as on Sept 13 to Rs. 493740 Cr. Compared to this stressed assets of 13 Private Banks are at Rs. 42914 Cr which represents 3.9% of their total advances.

Total Stressed Assets of PSU Banks are equivalent to Advances size of almost Six PSU Banks

To arrive at asset quality indicators for FY14, we have taken liberal assumptions where slippage ratios do not increase from current level and Credit grows at 15%. The provision coverage specific to NPA’s (excluding Technical write off) is expected to remain at an average of 35% for PSU banks and 66% for Private Sector Banks. In such a scenario the GNPA for FY14 may exceed an average of 5.00% for PSU banks and 2.1% for Private Sector Banks. The Net NPA for FY14 may reach an average of 3.25% for PSU Banks and 0.71% for Private Sector Banks. Any deterioration from expected credit growth may further worsen this ratio. In addition, we expect restructured advances to remain in the range of 8.0% to 8.5% for PSU’s and 2.5% to 3.0% for Private Sector Banks. Thus collectively stressed assets of PSU Banks for FY14 are expected to be at approximately 13.0% to 13.5% of Gross Bank credit. For private sector banks this number may be in the range of 4.5% to 5.0%.

If we compare the above stressed assets ratio of Sept 13 to market share of various banks in total banking advances, it is equivalent to advances size of almost six PSU Banks. In our view this is a strange situation and banks will have to strengthen their recovery efforts substantially to reduce this number. RBI is also further tightening the restructuring guidelines in phases and post 2015 a restructured asset may be classified as NPA with few exceptions. This is in line with international practice; and could also force consolidation of weaker PSBs with stronger ones, to improve the overall position of PSU Banking system.

The following table gives asset quality indicators of 20 PSU Banks

Table for Asset Quality Indicators of 20 PSU Banks

Source: Business Wire India


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