Rising bad debts a worry at Union Bank

Rising bad debts a worry at Union Bank
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First Published: Thu, May 07 2009. 10 28 PM IST

Updated: Thu, May 07 2009. 10 28 PM IST
The Union Bank of India stock fell 6% on Thursday, though the BSE Bankex moved up 1.8%. Despite a 20% rise in net interest income, the bank’s net profit fell 10.5% compared with the year-ago period. The bank management, however, points to a number of reasons why net profit dropped in the March 2009 quarter.
To start with, restructured accounts amounted to a huge Rs2,959 crore and they had to make provisions on them. Tax provisions, too, were much higher in the March 2009 quarter because the tax for FY08 had in large part been provided for in the first three quarters, unlike in FY09. But even if we keep provisions out of the picture, operating profit growth has been a mere 2.4%. That’s primarily due to a massive 449% rise in establishment expenses. The management points out that there were substantial write-backs of employee benefits in the fourth quarter of FY08, while additional provisions had been required for wage and pension arrears in the fourth quarter of FY09. After adjusting for these exceptional items, net profit growth was actually 45.64%. Recruitment, too, has been high and new branches have been opened, which have increased establishment expenses. As the management is at pains to point out, these expenses are investments in the bank’s future.
But not all the exceptional items have been losses. Profit on sale of investments, for instance, have been far higher than in the year-ago period. The bank’s net interest margin for the March quarter, too, has come down quite dramatically from 3.68% in the December quarter to 2.8%. That’s the reason the 27.8% y-o-y growth in advances hasn’t translated into an equally strong growth in net interest income.
Perhaps the biggest reason for concern, though, is increasing bad debts. The bank’s gross non-performing assets increased from 1.68% of gross advances at the end of December 2008 to 1.96% by the end of March 2009. Simultaneously, the provision cover for NPAs has slipped from at least 90% to 83%. Add to that the restructured loans, which make up around 3% of gross domestic advances.
Union Bank of India used to be one of the best performers among the public sector banks. The March quarter results show, however, that growing too rapidly during difficult times is a high-risk strategy.
Write to us at marktomarket@livemint.com
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First Published: Thu, May 07 2009. 10 28 PM IST