India state banks under pressure as bad debts mount

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Three of India's leading state-run lenders reported a drop in their first quarter net profits, weighed down by rise in provision for bad loans and cooling expectations of a turnaround in the country's dominant but ailing government banking sector.

India's banking sector, dominated by more than two-dozen state-run lenders, has been hobbled by its highest bad-loan ratio in a decade as slower economic expansion hurt companies' abilities to service debt.

While the pace of additions to bad loans has started slowing for most banks, higher provisioning is hurting their profits. State-run lenders also account for a majority of the sector's bad loans.

Bank of India, the nation's third-biggest state-run bank by assets, saw its profit for the three months to June plunge 84 percent from a year earlier, while its bad loans ratio jumped to a 13-year high of 6.8 percent.

The Mumbai-based lender is stepping up bad loan recovery efforts and aims to keep its bad loan ratio for the full fiscal year to March 2016 at lower levels than 5.39 percent for the last fiscal year, Chief Executive B.P. Sharma told reporters.

"We have deployed majority of our resources to focus on recovery and merit-based upgradation of stressed account," he said, adding the bank will be "a little bit stringent on taking exposure on risky accounts".

Bank of India's gross bad loan ratio of 6.8 percent as of end-June was the highest since 2002, he said. The bank's shares ended 5.7 percent lower to their lowest close since September 2013 in a Mumbai market that fell 0.3 percent.

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"A turnaround will take some time. And it will depend on the overall industrial recovery in the country ," said R.K. Gupta, managing director at Taurus Asset Management. However, he said that he would be a buyer of shares in state lenders, which trade at a steep discount to their private-sector rivals.

Punjab National Bank, the fourth-biggest state-run lender by assets, said its quarterly profit almost halved to 7.21 billion rupees. Its shares rose 5 percent as its bad loans ratio fell from the previous three months, although it was still higher than a year earlier.

Union Bank of India, the sixth-biggest state-run lender by assets, saw its first-quarter net profit falling 22 percent to 5.19 billion rupees, which was ahead of analysts' estimate of 4.99 billion rupees. Its gross bad-loan ratio increased to 5.53 percent in June quarter.

The second-biggest state-run lender, Bank of Baroda, and the biggest private-sector lender, ICICI Bank, are due to report first-quarter earnings this week. The market leader, State Bank of India, reports earnings in August.