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Higher Provisions, Write-offs on Assets to Dent Banks' Valuation

As public sector banks continue a ‘deep surgery’ for a few more quarters to wipe off bad loans, analysts say valuations of banks will be impacted this fiscal.

State-run banks, staring at an estimated Rs 5.3 lakh crore worth stressed assets - including NPAs and restructured loans - have embarked on a balance sheet clean-up exercise. The ‘deep surgery’ advocated by none other than Raghuram Rajan, Governor, RBI will present a true and fair picture of banks, but higher provisions and write-offs on sour assets, clearly will dent valuations.

“Earnings per share is coming down due to huge provisioning. Valuations will be impacted and that’s exactly why, in the interest of having public shareholding at the right valuation, such provisions are required,” Khushroo B Panthaky, chartered accountant, Partner, Walker Chandiok & Co LLP told Express.

But on the bright side, this could attract investors. The government plans to offload its stake in PSBs by up to 51 per cent to raise capital, but perhaps owing to poor investor sentiment, it is yet to go ahead.

A glimpse into the ongoing clean-up exercise was visible on Monday, when three state-run lenders - Punjab National Bank, Dena Bank and Central Bank of India - reported a dip in profits owing to higher provisioning and rising NPAs. Following the news, bankings stocks plunged by up to 12.4 per cent as investor sentiment took a massive hit on Tuesday.

Though Rajan recently said the stressed assets estimate was 17-18 per cent on the higher side, analysts say, the quantum of write-offs could be staggering. “We don’t know what the approximate write-offs will be. But once all of us are done with it, it will present a fair picture,” said R Koteeswaran, MD & CEO, Indian Overseas Bank, which has been consciously provisioning since last September.

A loan turns bad when the borrower misses scheduled payment for more than 90 days. Such a bad loan will be written-off when lenders realise that an asset can no longer can be converted into cash, or has no market value. But even after writing-off, banks will continue to pursue loan recovery.

This article first appeared in The New Indian Express on 11 February, 2016.