Rise in bad loans hits Union Bank profit

Rise in bad loans hits Union Bank profit

Alook at the earnings of private sector banks so far for the three months ended 30 June would have led to the conclusion that brokerages have been crying wolf about a tough quarter for the industry.

Yes, net interest margins have fallen, but most banks have reported a double-digit growth in net profits over a year ago, and loan growth, while subdued, has continued. But for Union Bank of India, unfortunately, the wolf seems to have broken in through the door.

Also see | Subdued Phase (PDF)

At the end of June, the bank’s loan book shrunk 3.4% from a quarter ago. More importantly—again unlike other earnings so far this season—the proportion of bad assets increased. Gross non-performing assets (NPAs) as a portion of loan book increased to 2.6%, around 40 basis points (bps) more from a year ago. One basis point is one-hundredth of a percentage point.

That meant it had to set aside substantially more money for bad loans in the June quarter. Provisions and contingencies rose by 117% from a year ago. The increase more than offset the 18% rise in net interest income and a 11.3% gain in fee income.

The fact that the proportion of low-cost current account and savings account deposits fell by 1 percentage point from a year ago also didn’t help. Neither did the increased amount the bank had to set aside for pension provisions.

Consequently, the bank reported a 23% fall in net profit. Sure, net interest margin rose only 7 bps from a year ago, but it declined 34 bps from the March quarter.

Things are not going to get better in a hurry. The proportion of NPAs will continue to rise as the bank moves to a new system of recognizing bad loans, something which might be seen in most public sector banks.

The management has cut the target for advances by 3 percentage points to 19%. It has also shaved 2 percentage points from its deposit growth forecast to 17% and has raised lending rates by 25 bps. But that may not be enough to stave off another quarter of weak earnings.

Graphic by Sandeep Bhatnagar/Mint

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