PSU bank stocks surge as govt hints at NPA resolution plans

Nifty PSU Bank index rises 3.31% and midtier lenders hit hardest by bad loans crisis gain the most a day after FM Jaitley announced govt was working with RBI on radical overhaul

Shares of state-owned banks jumped on Friday after finance minister Arun Jaitley said the government was working on a radical proposal to resolve the bad loans crisis in Indian banking.

The Nifty PSU Bank index, a gauge of public sector bank shares, gained 3.31% on Friday compared to a 0.24% rise in the benchmark 50-stock Nifty. Experts warned any investor exuberance may be premature.

Mid-tier public sector lenders, which have borne the brunt of asset quality problems, gained the most. Oriental Bank of Commerce surged 6.6% on NSE while Bank of India rose 5.2%. The announcement also gave a boost to private sector bank stocks such as ICICI Bank’s.

On Thursday, Jaitley said the government was working with the Reserve Bank of India to quicken the resolution of the bad loans. While he didn’t reveal details, he had hinted previously that the government was looking at increasing the number of oversight committees to deal with bad loans.

At the end of December, 41 listed commercial banks were weighed down by gross non-performing assets of ₹7 trillion. Out of this, state-owned banks accounted for ₹6.21 trillion, or about 88.7% of toxic assets. This is much larger than their credit share of 70%. State-owned banks have been unwilling to restructure or dispose of bad loans at a large discount, fearing their decisions could come under the scanner at a future date.

“In way of that resolution, several issues come up: You have to find a buyer, strategic partner to find a solution. And if people are slow at doing so, thinking that the system is somewhat hopeless, the system will have to bring in some other instruments,” Jaitley said

Still, analysts said that whenever the government does introduce new measures to reduce stress in the banking sector, banks will initially feel some pain given that ta write down in the value of bad assets is inevitable. “Whenever things will be delivered, bank stocks will get correct. There will be sharp decline in profitability of banks for a few quarters since banks will take haircut as huge amount is piled up,” said Ashutosh Mishra, senior analyst at Reliance Securities Ltd.

While higher provisions for loans is one part of the equation, banks are also unlikely to see a quick earnings recovery as credit growth stalls.

The latest RBI data show that bank credit growth has dropped to 4%. With capacity utilisation across industries still poor, “in our view, wholesale credit growth will not revive even with a successful resolution of NPLS (non-performing loans) in the large corporate loan book,” said Kotak Institutional Equities in a 15 March note to clients.