Higher provisions on the back of deteriorating asset quality
continue to hurt profitability of city-based public sector banks
UCO Bank today said its net profit for the quarter ended December 31, 2012 declined 69% from a year earlier as it made more provisions due to rise in bad loans. Its local rival United Bank of India's (UBI) profit after tax fell by 81% year-on-year during the quarter because of similar reasons.
Only a week ago another Kolkata-based lender Allahabad Bank reported 44.5% year-on-year drop in its third quarter net profit on account of higher provisions.
"If you look at our operating profit it has shown an increase. Our performance improved during the quarter. But since provisions increased by 73% our profit declined," Arun Kaul, chairman and managing director of UCO Bank, told Business Standard over phone.
The bank made provisions of Rs 728 crore in October-December quarter compared to Rs 420 crore in the corresponding period of previous year.
UBI's earnings were more severely affected as it more than doubled its total provisions. The bank made provisions of Rs 450 crore in the last quarter compared to Rs 199 crore a year ago. "The profit declined only because of provisioning requirements and nothing else. Operating profit mirrors the bank's health more accurately. Our operating profit increased during the quarter," Sanjay Arya, executive director of UBI, said.
He added that the bank decided to make additional provisions during the quarter after it received the annual inspection report of the Reserve Bank of India (RBI). The central bank had directed UBI to make more provisions against certain loans where timely repayment was uncertain.
While UBI's gross non-performing asset ratio deteriorated by 114 basis points to 4.42%, UCO Bank's gross bad loan ratio increased by 204 basis points to 5.53% at the end of December, 2012.
UBI and UCO Bank restructured Rs 300 crore and Rs 900 crore loans, respectively during the quarter.
However, senior executives of both the banks were confident that the lenders will be able to improve their earnings performance in coming quarters. "We have made sufficient provisions. Our provision coverage ratio has improved to 67%. Going forward we don't believe that there is any cause for concern," Arya said.
A similar view was echoed by Kaul. "Things will definitely improve in future. We have stepped up our recovery efforts and we are confident that our performance will be better in coming quarters," he said.