9 banks to gain from PSU recapitalisation plan

The Indian banking sector, especially the state-owned entities, have hogged the limelight as the government's announcement of a fiscal neutral capitalisation raised hopes of a revival of not only these entities but also the long-buried capex cycle.

The quarterly results, therefore, got somewhat relegated to the background. Now that the dust appears to be settling, it is worth checking on the numbers as well as the grand recapitalisation plans to explore if the fortunes of the sector are really changing or is it another hope rally that is likely to dissipate?

The analysis of the 21 listed PSU (public sector) banks suggest an improvement in operating performance with a sequential growth in operating profit. However, the higher provisioning mostly on account of the bad assets that have been referred to NCLT (National Company Law Tribunal) dented profitability. So, the overall profitability of the banking sector was driven by the private sector, which delivered a bottomline of Rs 10,632 crore.

What stood out in the quarterly performance of PSU banks was the muted net addition to gross NPL (non-performing loan). For the aggregate, the net addition to the stock of NPL was only Rs 1,959 crore which is a sharp decline from the previous quarter. Individual results from the banks also point to declining slippages quarter-on-quarter. Thanks to the higher provision, the overall provision coverage ratio (the percentage of provision that a bank carries against its bad loans) for the group improved by 280 basis points to 46 percent.

However, the future roadmap is contingent on two parameters - business growth and asset quality -- that deserves greater scrutiny. Lack of capital, and asset quality concerns of PSU banks have been a boon for many of their private sector counterparts as evident from the incremental market share gains in the first half of the current fiscal.

What has worsened the situation for PSU banks is the well-known asset quality problem and lack of core capital to expand business. A large number of banks have CET1 (common equity tier 1) ratio that is below the required 8 percent minimum that will be applicable from FY19.

If one were to prudently adjust the net non-performing assets from the core capital of the banks, some of the banks of the likes of Bank of Maharashtra, Central Bank, Corporation Bank, IDBI Bank, Indian Overseas Bank, UCO Bank and United Bank have completely eroded their capital. In fact, most of these entities are actually degrowing their asset book and have very little visibility. It is worth noting that the combined balance sheet of these chronically troubled entities is close to Rs 17.8 lakh crore with the size of the asset book of approximately Rs 10.6 lakh crore. It is a question of time before these businesses migrate to stronger PSUs or private sector banks.

The answer, although premature, may be unequivocally no. If one looks at the aggregate number, the picture is crystal clear. At the end of September 2017, the stock of NPA that doesn't carry provisions is approximately Rs 4 lakh crore.. If one considers the declared restructured assets of the PSU banks to the tune of Rs 1.7 lakh crore, then on this Rs 5.7 lakh crore if conservatively a provision of 45 percent were to be created in the next two years, the provisioning requirement will be close to Rs 2.6 lakh crore.

In essence, it means the recapitalisation amount (Rs 2.11 lakh crore) will mostly be used up for provisioning on assets that are already turning sour without providing much life to the patient in critical care, leave alone the medicine to make them run. So the weak are unlikely to turn strong because of this exercise alone.