Non Performing Assets (NPA) and its impact on Equity Share Price of the Bank

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NPAs and its impact on Equity Share Price of the Bank

Authors:

Saurabh Maheshwari

Dr. Alok Mohan Sherry

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Road Map for Presentation

About Non Performing Assets (NPAs)

Objective of the Study

Utilization of relationship for Trading

Impact of Gross NPAs of SBI on its

Equity Share Price

Relationship between NPAs and Equity

Share Price of the Bank

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What is Non Performing Assets (NPAs)

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About Non Performing Assets (NPAs)

BANK/FIs

Lender(Commercial Banks)

Borrower (Priority & Non Priority Sector)

Assets for Banks (Lender) and Liabilities for

Borrower

How an Assets become NPA

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When Borrower does not pay back the loan to the designated lender for an extended period of time then that loan becomes Non Performing Assets (NPAs) of the lender

(Banks/FIs) because it is not yielding any income to the lender in the form of principal and interest pay. When Bank provides any advance or loan to some one than that

advance or loan becomes the assets of the bank . Because it generates fixed interest income for the bank.

Note :- Banks should, classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter.

How an Assets become NPA……

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An Asset or Loan or advance of the Bank given to borrower becomes Non Performing Asset where :-

Interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan

The account remains ‘out of order’ as indicated An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of ththe e sanctioned limit/drawing power. In cases where the outstanding balance in principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as 'out of order’, in respect of an Overdraft/Cash Credit (OD/CC)

The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted

The instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops

As per the Master Circular No. RBI/2011 – 12/66 DBOD.NO.BP.BC. 12 /21.04.048/2011 – 12 on Master Circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances issued by Reserve bank of India

How an Assets become NPA………..

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The instalment of principal or interest thereon remains overdue for one crop season for long duration crops

The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, 2006

In respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.

Note :- Banks should, classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter.

Objective of the Study To Study the impact of NPAs on Equity

Share Price of the Bank Find the relationship between NPAs and

Equity Share Price of the Bank How this relationship may be utilized for

Trading Opportunities in the Capital Market

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Impact of NPAs on Equity Share Price of the Bank – SBI as Case Study

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Sr.No.

Broadcast Date and Time

Quarter End

Time Period For Volatility Calculation

Volatility In Equity Share

(In %)

Quarterly Gross NPAs

(In %)

Net % Change (Quarterly Gross

NPAs %)

108th Nov 2010

18:25 Sep-1029th Oct 2010 to

18th Nov 2010 -15.65% 11.43% 4.83%

2

22nd Jan 2011 13:40 Dec-10

12th Jan 2011 to02nd Feb 2011 11.14% 1.00% -10.43%

317th May 2011

13:08 Mar-1107th May 2011 to

27th May 2011 -19.48% 8.06% 7.06%

413th Aug 2011

13:51 Jun-1103rd Aug 2011 to

23rd Aug 2011 -13.12% 9.64% 1.58%

State Bank of India is taken as case study which comes under the Bank Nifty Index in NSE and has the weightage of 13.03% in the Bank Nifty. SBI is the largest lender in the PSUs Banks category with the market capitalization of Rs. 2,20,649.68 Cr. (as on 25.02.2015) which covers 50.30% market cap (Rs. 4,38,665.14 Cr.) of PSUs Banks in the Indian Banking System. Gross NPAs from the 18 quarterly results (From Sep 2010 to Dec 2014) of the bank have been taken for the observation.

Impact of NPAs on Equity Share Price of the Bank cont……

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Sr.No.


Quarter End



(In %)


(In %)


NPAs %)

509th Nov 2011

12:35 Sep-1131st Oct 2011 to 19th Nov 2011 -15.84% 22.25% 12.61%

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13th Feb 2012 15:15 Dec-11

03rd Feb 2012 to 23rd Feb 2012 21.53% 18.12% -4.13%

718th May 2012

13:11 Mar-1208th May 2012 to

28th May 2012 16.91% -1.05% -19.17%

810th Aug 2012

18:54 Jun-1231st July 2012 to

20th Aug 2012 -11.03% 18.85% 19.90%


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Sr.No.


Quarter End



(In %)


(In %)


NPAs %)

909th Nov 2012

14:44 Sep-1231st Oct 2012 to 19th Nov 2012 10.29% 4.34% -14.51%

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13th Feb 2013 12:28 Dec-12

03rd Feb 2013 to 23rd Feb 2013 -10.47% 8.65% 4.31%

1129th May 2013

11:25 Mar-1319th May 2013 to

09th June 2013 -18.83% 4.24% -4.41%

1216th Aug 2013

15:53 Jun-1306th Aug 2013 to

26th Aug 2013 -13.90% 18.95% 14.71%


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Sr.No.


Quarter End



(In %)


(In %)


NPAs %)

1322nd Nov 2013

12:17 Sep-1312th Nov 2013 to

02nd Dec 2013 12.15% 5.44% -13.51%

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15th Feb 2014 17:41 Dec-13

5th Feb 2014 to 25th Feb 2014 -3.57% 5.60% 0.16%

1503rd June 2014

13:57 Mar-14

23rd May 2014 to

13th June 2014 10.47% -9.14% -14.74%

1611th Aug 2014

16:01 Jun-1401st Aug 2014 to

21st Aug 2014 -5.43% -1.90% 7.24%


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Sr.No.


Quarter End



(In %)


(In %)


NPAs %)

1718th Nov 2014

19:53 Sep-1408th Nov 2014 to

28th Nov 2014 19.66% -0.46% 1.44%

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14th Feb 2015 14:57 Dec-14

04th Feb 2015 to 24th Feb 2015 -10.47% 2.10% 2.56%

Relationship between NPAs and Equity Share Price of the Bank

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Results of Regression & Correlation Analysis between Net % Change in Quarterly Gross NPAs % and Volatility in Equity Share Price of State Bank of India

Multiple R 0.693032285R Square 0.480293749Significance F 0.001429Correlation -0.693032285

After doing Regression, R Square is 0.48 which means 48% variability in Volatility in Equity Share Price of State Bank of India from Net % change in quarterly Gross NPAs % or indicates that 48% of the variance in Volatility in Equity Share Price of State Bank of India may be predicted from the variable Net % change in quarterly Gross NPAs %. As there is highly negative correlation between the movements in Gross NPAs and Equity Price of the Bank, so that Gross NPAs also damage the Equity of the Indian Banking System.

Independent Variable: Net Percentage Change in Quarterly Gross NPAs %Dependent Variable: Volatility in Equity Share Price of SBI

Utilization of Relationship between NPAs and Equity Share Price of the Bank for Trading Opportunities in the Capital Market

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Sr. Broadcast Result Quarter Quarterly


NPAs %)

Movement of Equity Share Price (SBI)

No. Date and Time End Gross NPAsPre-Result Declaration

Period

Post-Result Declaration

Period (In %)

1

08th Nov 2010

Sep-10 11.43% 4.83% 12.73% -15.65%18:25

2

22nd Jan 2011

Dec-10 1.00% -10.43% -6.21% 4.43%13:40

3

17th May 2011

Mar-11 8.06% 7.06% 0.96% -16.21%13:08

4

13th Aug 2011

Jun-11 9.64% 1.58% 1.31% -9.36%13:51

5

09th Nov 2011

Sep-11 22.25% 12.61% 7.43% -15.57%12:35

Utilization of Relationship between NPAs and Equity Share Price of the Bank for Trading Opportunities in the Capital Market conti……

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NPAs %)



Period


Period (In %)

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13th Feb 2012

Dec-11 18.12% -4.13% 1.03% 10.83%15:15

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18th May 2012

Mar-12 -1.05% -19.17% -12.57% 15.77%13:11

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10th Aug 2012

Jun-12 18.85% 19.90% 1.32% -5.93%18:54

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09th Nov 2012

Sep-12 4.34% -14.51% -10.29% -1.12%14:44

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13th Feb 2013

Dec-12 8.65% 4.31% -0.93% -6.08%12:28


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NPAs %)



Period


Period (In %)

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29th May 2013

Mar-13 4.24% -4.41% -15.13% -1.10%11:25

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16th Aug 2013

Jun-13 18.95% 14.71% -1.17% -4.28%15:53

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22nd Nov 2013

Sep-13 5.44% -13.51% 1.05% 6.83%12:17

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15th Feb 2014

Dec-13 5.60% 0.16% -4.89% 3.95%17:41

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03rd June 2014

Mar-14 -9.14% -14.74% -5.60% 3.38%13:57


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NPAs %)



Period


Period (In %)

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11th Aug 2014

Jun-14 -1.90% 7.24% -3.10% 2.99%16:01

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18th Nov 2014

Sep-14 -0.46% 1.44% 9.12% 10.29%19:53

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14th Feb 2015

Dec-14 2.10% 2.56% 5.50% -5.18%14:57

Observations

19Source :- http://dbie.rbi.org.in/DBIE/dbie.rbi?site=home

6 Quarterly Results shows that when Bank reports poor NPAs then Equity Share Price moves on upside in pre - result declaration period and goes on downside in post - result declaration period

5 Quarterly Results shows that when Bank reports good NPAs then Equity Share Price goes on downside in pre – result declaration period and moves on upside in post declaration period

2 Quarterly Results (Dec-11 & Sep-13) shows that when bank reports good NPAs then Equity Share Price moves on up direction but no more than 1.5% in pre – result declaration period and also moves on up side in post – result declaration as earlier quarters

2 Quarterly Results (Dec-12 & Jun-13) shows that when bank reports poor NPAs then Equity Share Price goes on downside but no more than -1.5% in pre – result declaration period and also goes on downside in post – result declaration as earlier quarters

Observations Conti……

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3 Quarterly Results (Sep-12, Mar-13 & Sep-14) shows that unexpected movement in Equity Share Price of the Bank having very less correlation with quarterly NPAs reporting.

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Thanks

Saurabh MaheshwariDr. Alok Mohan Sherry

Non Performing Assets (NPA) and its impact on Equity Share Price of the Bank

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