In an interview to CNBC-TV18, D Sarkar, CMD of Union Bank of India and Ananda Bhoumik of India Ratings & Research spoke about the asset quality concerns that India is facing
Banking sectors, which has been going through series of mishaps following lower economic growth, Reserve Bank of India's measure to tighten liquidity, may find it even more difficult to maintain their asset quality going ahead as experts predict rise in non-performing loans and debt restructuring pleas.
Recent macro data such as IIP numbers in May and export data showed contraction in growth pointing that worst may not be over for the economy, which may lead to fresh cycle of non-performing assets. There are also anecdotal evidences of big companies going for corporate debt restructuring. For instance a consortium of 23 banks led by State Bank of India (SBI) is likely to refer Bombay Rayon to the Corporate Debt Restructuring (CDR) cell for recasting the company’s debt of around Rs 4,000 crore.
"The recovery cycle certainly has been pushed back. FY14 will be a bit of a washout as far as Gross Domestic Product (GDP) expansion is concerned. The pipeline of CDRs and restructuring will continue to be strong," Ananda Bhoumik of India Ratings & Research told CNBC-TV18.
D Sarkar, CMD, Union Bank of India also agreed that asset quality of bank were directly impacted due to poor performance of the economy. He stressed that despite efforts to maintain status-quo asset quality was under stress. Big accounts especially under the steel and power sector are facing the most stress, Sarkar said. He added that the Union Bank was trying to maintain its slippages at Rs 800-Rs 900 per quarter.
Bhoumik predicts that bank’s stressed assets could rise to 12-12.5 percent of advance by March 2014 from 9 percent recorded at the end of FY13.
Below is the verbatim transcript of the discussion.
Q: Are you getting a sense after looking at the macro data and the increasing number of Corporate Debt Restructuring (CDR) cases that the Non-Performing Loan (NPL) cycle has been extended probably to all of FY14?
Bhoumik: The recovery cycle certainly has been pushed back. FY14 will be a bit of a washout as far as Gross Domestic Product (GDP) expansion is concerned, good monsoon notwithstanding. You are right the weak industrials have been a bit of a setback. The pipeline of CDRs and restructuring will continue to be strong. We are certainly going to see a pick up in that. NPL conversions have been surprisingly benign in March and we have also seen a slowdown in defaults, but as the pace of growth remains slow I have concerns certainly on the Small and Medium Enterprise (SME) book and we may see NPLs pick up there, aside from the large corporates where the accounts are well identified.
Q: What were your previous numbers in terms of system NPL? I think the last number we have from the Reserve Bank of India (RBI) is 3.5 percent of total advances, not counting restructured assets. What were your numbers for FY13 and your estimates for FY14 and how much higher will you tweak them?
Bhoumik: FY13 NPLs ended at around 3.4 percent and restructured assets were around about 6 percent of advances, so totalling about 9 percent of stressed assets. We had earlier estimated the NPL rising from 3.4 percent to peaking at around 4 percent. Our sense is that with the growth failing to pick up and the SME conversions being higher than expected, this 4 percent could actually rise to perhaps 4.2-4.3 percent. On the CDR restructured assets we are seeing a total of around 8 percent, so that 6 percent number going to around 8 percent. So total of around 12-12.5 percent stressed assets by March 14.
Q: Do you expect this to therefore constrain the capital available with banks and therefore growth also taking a beating anyways? Any numbers on loan growth and capital constraints?
Bhoumik: I think capital should not be a problem. As you have said loan in any case is anemic and weak. Loan growth could actually slowdown further from last year's 18 percent. This year I think anything between 14-15 percent is probably a given, simply because the demand for credit is just so weak, investments are not just happening. So we would think there would be a slight slowdown in growth, but capital should not be a constraint at all, because the demand for capital is just not there.
Q: We have seen a lot of asset quality concerns not just for public sector banks, but now we are seeing it rise in private sector banks as well. We saw names like Kotak Mahindra Bank, Federal Bank report a stress in asset quality and now we are seeing rising CDR cases as well, the latest we saw from Bombay Rayon. In your mind, do you think that asset quality weakness will continue for most banks well into FY14?
Sarkar: The asset quality of the banking industry is under stress because the economy is not doing well, that everybody knows about. When the economy is not doing well the direct impact is coming on the asset quality. We are just trying to maintain the same level, because whatever guidance is given you know that in March we could maintain at 2.98 percent, but still I am telling you this that they are very much under stress, because some of the recovery issues are there. Still some of the big accounts are facing the trouble, especially in the steel and power sector. So we are just trying level best to maintain at the same level, but asset quality is really under stress in the economy as a whole and we are not the exceptions. As I told you we are trying to maintain at that level.
Q: What do you suspect will be your own slippages in the quarter just over and in even the current quarter? Do you think the slippages will be more than the Rs 875 crore you reported in Q4?
Sarkar: Our average slippage per quarter is Rs 800-900 crore. We are trying to maintain it. More or less the same level is maintained, but basically what happens is suddenly one or two big accounts come in all calculations goes wrong. So in that case I feel that we will be able to maintain same level of Rs 800-900 crore per quarter. Our audit is going on. We will be coming with the result in next week and we are hopeful that we will be able to maintain the slippage, because all sorts of steps have been taken to maintain the slippage level at that ratio.
Union Bank stock price
On July 23, 2014, Union Bank of India closed at Rs 196.30, down Rs 0.5, or 0.25 percent. The 52-week high of the share was Rs 259.60 and the 52-week low was Rs 97.10.
The company's trailing 12-month (TTM) EPS was at Rs 26.91 per share as per the quarter ended March 2014. The stock's price-to-earnings (P/E) ratio was 7.29. The latest book value of the company is Rs 291.36 per share. At current value, the price-to-book value of the company is 0.67.
READ MORE ON NPL, asset quality, CDR, D Sarkar, Union Bank of India, Ananda Bhoumik, India Ratings & Research
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