Growing NPAs and a rising wage bill have caused shares of major public sector banks like Allahabad Bank and Indian Bank to crash up to 25% over the past month. Analysts expect disappointing results from these banks in the coming quarters due to higher provisions for bad loans and increased wage costs. Shankar Sharma of First Global is bearish on banks, saying that growth rates of 15-20% indicate excessive risk-taking given India's economic growth of only 5%. PSU banks will continue to struggle with asset quality as NPAs remain high and new RBI regulations increase provisioning requirements.

1. Growing NPA Load to Bring More Pain for PSU Banks
Shares of public sector banks (PSBs) such as Allahabad Bank, Indian Bank, Bank of
India among others have crashed up to 25% over the past one month on fears of growing
non-performing assets (NPAs) in sectors like chemicals, pharmaceuticals, steel and textiles,
as well as the spectre of a rising wage bill.
The future also doesn’t look promising for these banks as they are expected to report
disappointing results in the coming earnings season.
Shankar Sharma of First Global, an ace investor, is bearish on the banking sector. “Banks
are unlikely to deliver 15% to 20% earnings as the Indian economy itself is finding it tough to
grow at 5%,” he says. Therefore, if any bank is growing at 15%, then one has to conclude
that it is taking excessive risk, he reasons.
Analysts say that these banks will have to take some tough decisions on debt restructuring,
besides advising companies – where they have an exposure – on recasting their
businesses. The combined gross non-performing assets and restructured loans for the
banking industry is around 10% of the total loan outstanding, which is a big worry, and most
of the bad loans are from PSU banks,” says Pankaj Pandey, head of research at ICICI
Securities. “PSU banks will continue to struggle with asset quality. Also, the Reserve Bank
of India’s new provisioning norms on bad loans will put PSU banks at further risk,” he adds.
“We expect government banks to report disappointing results for the April-June quarter as
they may be impacted at the net profit level by higher wage revisions. State-run banks
like PNB, BoB, BoI and Canara Bank’s headline earnings are expected to come down by 10
to 20% (year-on-year) on higher wage costs and lower loan yields,” says Rajeev Varma,
research analyst at DSP Merrill Lynch in a note.
Recently, the government asked state-run banks to reduce lending rates, and clear stalled

2. projects. If this happens, it may hit banks’ net interest margins adversely and further add to
the rising NPAs, fear analysts.
“The pain for PSU banks may continue as non-performing liabilities, coupled with high
restructuring, especially in the power sector, may add further pressure,” says Manish Karwa,
research analyst at Deutsche Bank in a research note.
RBI has issued draft guidelines that would require banks to make higher provisions
(standard provisions) and increase risk weightage on exposure to companies that have
unhedged foreign-currency exposure. “We believe large PSU banks such as SBI, BoB, BoI
and PNB will get impacted as they are involved in lending through foreign currency,
especially in long-term loans,” says Kotak Institutional Equities in a research note.
The falling rupee has also made things worse for these banks, already grappling with a host
of problems.
“Many corporates are under severe stress as the rupee has fallen to 60 against the dollar.
We expect the asset quality of PSU banks to deteriorate further as business of many
corporates has come under stress,” says Amar Ambani, head of research, IIFL.
“We would like to advise investors to avoid PSU banks despite prices falling sharply from
their highs,” he adds.
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