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Continuous Deterioration in Banks' Return on Equity
Dec 30, 2016

The Reserve Bank of India (RBI) yesterday released its Financial Stability Report (FSR) for 2016. The central bank has, as usual, raised the red flag on quality of loans in public sector banks. The latest NPA numbers show significant levels of stress.

As a shareholder in banks, if the NPA number does not worry you, here is something that should. The sector's average Return on Equity (RoE) has crashed from 10.4% in FY15 to just 3.6% in FY16. All thanks to the profits written off on account of NPA provisions. 70% of them in the books of public sector banks. More importantly, the drag in the ROE is likely to persist in FY17 too. So shareholders of public sector banks have a reason to re-think the margin of safety required to invest in such stocks.

Data Source: SBI Daily Data Wrap

This Chart Of The Day was published in The 5 Minute WrapUp - 9 Questions On Top of Our Minds at The End of 2016

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