Government lenders stressed but investors hopeful

The stress on profitability continues for most public sector banks (PSBs) as they struggle to cope with a rise in assets turned bad, in the current uncertain macroeconomic environment. The higher cost of funds, with a cascading effect on margins, and the absence of trading profits further capped their earnings growth in the second quarter. However, investors seem convinced the worst in terms of asset quality deterioration is over, leading to a sharp rise in banking stocks. Four state-run lenders – Allahabad Bank, Bank of Baroda (BoB), Bank of India (BoI) and Union Bank of India (UBI) – announced their second quarter earnings on Thursday. The shares of these banks gained 7.4-22.7 per cent in Thursday’s trade. The largest among these, BoB , saw its July-September net profit shrinking 10 per cent from a year earlier to Rs 1,168 crore, as it made higher provisions and incurred more expenses. On a yearly basis, provisions and operating expenses increased 33 per cent each. Besides non-performing assets (NPAs), the proposed revision of employee wages also contributed to the rise in provisions.

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