BackRise in bad loans hits Union Bank profit
Rise in bad loans hits Union Bank profit
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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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