Wary on PSU banks as asset quality stress may remain: JP Morgan

Moneycontrol BureauThe accelerated recognition from the Reserve Bank of India’s (RBI’s) asset quality review (AQR) is a positive for transparency in public sector banking industry, but will not trigger an upturn in the cycle, reads a  note by JP Morgan.

The broking firm expects significant headwinds to the pre-provision operating profit  growth of banks due to various reasons like muted loan growth (given capital constraints and risk aversion in the corporate segment), pressure on margins due to high non-performing loans (NPLs), low yield and continued pressure on current and savings account (CASA) ratios, among others.

Considering the pressure from both existing and incremental NPLs, the industry's earnings estimate has been pared by over 20 percent, the note says adding, "slow growth and high real rates should continue to be an overhang."

The only ray of hope, the note points out, is that the policy environment is moving in the right direction.

The strategy that seems to cover all bases like NPL resolution in both short and long term and governance reforms will yield results in the long term and probably make the next credit cycle less vicious, it concludes.