BackPSU banks hit by rising provisions, slower interest income
Cumulative net profit of 21 listed public banks fell 3.78% to `11,231 crore in December quarter
Premium(Pradeep Gaur/Mint)
Mumbai: Profits of state-run banks have shrunk for the first time since March 2011 because of an increasing number of bad loans and slower income growth from interest.
Cumulative net profit of 21 listed public banks fell 3.78% to ₹ 11,231 crore in the quarter ended 31 December, the first drop since the 3.55% fall in the quarter ended March 2011, according to Capitaline data.
Profitability at state-controlled banks has been impacted because of muted growth in margins and interest income, according to Saikiran Pulavarthi, an analyst at Espirito Santo Securities. “Margins have been hit because yield on advances haven’t risen and the banks could not pass on the high deposit rates to borrowers," Pulavarthi said.
Net interest margin (NIM), or the spread between yields on advances and cost of funds, fell in the December quarter.
For example, State Bank of India, the country’s largest lender, reported a NIM of 3.42%, down from the 3.84% it earned in the same quarter in 2011, mainly because the bank had aggressively cut lending rates while deposit rates had not come down sharply.
The bank’s average cost of deposits increased to 6.31% in December 2012 from 5.9% in December 2011, while the yield it earns on loans declined from 10.93% to 10.75% during the same period.
Public sector bank earnings have also been hit because of higher provisions, said Dinesh Shukla, an analyst at Sharekhan Ltd.
“Together with low net interest income (NII) and margins, provisions have also increased. These banks have had to provide for bad loans which they have accumulated because the economic scenario is weak and they have higher exposure to stressed sectors like infrastructure, textile, iron and steel, real estate, small and medium enterprises and mid-level companies," Shukla said.
Public sector NIIs have risen just 4.83% to ₹ 38,356 crore in the December quarter, the slowest pace since it dropped 0.77% in the quarter ended March 2008, Capitaline data show.
Provisions have increased 18% to ₹ 12,820 crore, reflecting the 55% rise in net non-performing assets and also as Reserve Bank of India (RBI) asked banks to increase provisions on standard restructured assets by 75 basis points (bps) to 2.75%. One bps is 0.01 percentage point.
In contrast, private bank NIIs have increased 23% and they have had to set aside ₹ 1,596 crore in provisions up just 7% from December 2011, although net non-performing assets (NPAs) have risen at the fastest pace since September 2009 at 23%. The higher provisions and slower growth have started to have a direct impact on the profitability of government-owned banks. For example, Bank of Baroda, the second-largest public sector bank, reported a fall in profit for the first time in 30 quarters in December, mainly because of higher provisions for bad loans.
Profit for the quarter ended December dropped to ₹ 1,011.62 crore from ₹ 1,289.85 crore in the year ago as provisions rose 23% to ₹ 1,029.31 crore from ₹ 836.74 crore as the bank kept its coverage ratio—the ratio of provisions held to gross NPAs—at above 70%.
NPAs surged to ₹ 7,321.45 crore from ₹ 3,895.08 crore in the year-ago period and ₹ 5,879.01 crore in the September quarter.
Private banks have done better because of their robust asset quality, stable margins and healthy loan book growth, according to Manish Ostwal, an analyst at Kisan Ratilal Choksey Shares and Securities Pvt. Ltd.
“Middle-level banks like Yes Bank Ltd, ING Vysya Bank Ltd and IndusInd Bank Ltd have beaten market expectations. Private sector banks are also well placed for the future
because their loan book is made up of retail loans and working capital loans," Ostwal said.
Ostwal said Punjab National Bank (PNB) and Union Bank of India have done better than peers in the quarter gone by because they were able to arrest the pace of deterioration in their asset quality.
PNB reversed the trend of slippages being more than recovery and upgrades for the first time in 15 quarters in December. Around ₹ 2,968 crore of loans were classified as NPAs; the bank managed to recover or upgrade ₹ 2,994 crore of debt that had earlier turned bad, K.R. Kamath, chairman and managing director of PNB said.
Union Bank managed to bring down fresh slippages to ₹ 677 crore in the December quarter from ₹ 792 crore in the September quarter. However, it was still higher than the ₹ 566 crore registered in the year ago. The bank recovered or upgraded to standard accounts ₹ 453 crore of its old bad debts.
NPAs have to be watched continuously, said Pulavarthi from Espirito Santo. “I think SBI is the best placed among PSUs because it has seen the worst in terms of asset quality and will improve the quickest," he said.
Shukla from Sharekhan said recovery for banks will depend on how the economy performs. “SBI and PNB are the best placed to take advantage of the recovery because of their size and network," Shukla said.
Ostwal from KRC warned that the pace of restructuring loans could increase in the quarter to March as banks look to clean their books in the last quarter of the fiscal year.
“Large banks like ICICI and Axis may see an increase in restructuring in Q4 because of accounts like Suzlon Energy Ltd. Banks will clock a 16% to 17% credit growth, but some like Canara will be lower at 8% or 9% because they have high level of infrastructure loans and industrial capital expenditure loans which are not picking up," Ostwal said.
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