The quarter gone by was tough on most banks, but public sector banks' (PSBs) performance was worse than their private peers, especially in terms of asset quality and top line growth, leading to a dismal show on the profit front.
PSBs' provisioning for bad loans totalled Rs 43,717 crore in the December 2015 quarter (Q3 FY16) - a figure that has doubled from the year-ago levels. And, this figure is eight times the provisions made by private-sector peers, even as PSBs' share of advances (industry market share) is three times that of private peers.
As a result, PSBs' profitability was severely impacted. With 11 out of 25 PSBs ending the quarter with a loss and another eight witnessing a sharp fall in profit (between 59 and 93 per cent) compared to the year-ago period, they ended up with a combined loss of Rs 10,794 crore in Q3 FY16 versus a profit of Rs 33,613 crore. (BANKING ON KEY NUMBERS)
Bank of Baroda (BOB), IDBI Bank, Indian Overseas Bank, Bank of India and UCO Bank posted losses of Rs 1,400-3,350 crore, while profit for major banks such as Punjab National Bank, Union Bank, and Canara Bank shrunk 74 per cent to 93 per cent during the December 2015 quarter, while that of State Bank of India (SBI), too, collapsed by nearly 62 per cent, on a year-on-year (y-o-y) basis.
However, thanks to the combined net profit of Rs 11,101 crore posted by private banks, led by HDFC Bank, ICICI Bank and Axis Bank, the entire banking pack (39 banks studied for this purpose) posted a combined net profit of Rs 307 crore in Q3 FY16. This is despite ICICI Bank's provisioning trebling in Q3 FY16 and Axis Bank witnessing 40 per cent jump in provisions made for bad loans. Among private players, only three banks saw their profits decline on a y-o-y basis, and just one ended the quarter with a loss.
The overall asset quality for the industry itself weakened in the December 2015 quarter as the total gross non-performing assets (NPAs) recognised stood at Rs 4,37,860 crore, up 50 per cent y-o-y (each for public and private sector banks). PSBs accounted for Rs 3,96,386 crore or 90 per cent of the total gross NPAs in the quarter. Average gross NPA ratio for PSB stands at 7.32 per cent - about three times more than private banks (2.74 per cent). While ICICI Bank and Dhanlaxmi Bank were the outliers in the private packs, gross NPA ratio of PSBs such as Indian Overseas Bank, UCO Bank, Dena Bank, Bank of Baroda, Bank of India, Central Bank and United Bank of India and Punjab National Bank were much higher.
Even as asset quality pressures are expected to persist, the declining net interest income (NII), particularly in the PSBs, compounds the worries. Net interest income is interest earned minus interest expended. Much in contract to a healthy 21.6 per cent y-o-y growth in NII posted by private banks, the combined figure has declined by about two per cent for PSBs. Decline was steep in case of Bank of Baroda, UCO Bank, Dena Bank, and Allahabad Bank, while SBI, too, saw a 1.2 per cent y-o-y dip in NII in Q3 FY16. Weak growth in NII points to a subdued lending business, though a part of it was also due to changes in regulation.
For most private banks, NII growth was strong. Likewise, other income too grew at a fast pace, except for some smaller private banks. Thus, a majority of them reported healthy growth in net profit, even as their provisioning (like PSBs) surged on a y-o-y basis. Among PSBs, only a few saw good growth in other income. But, with most reporting weak NII growth, this along with a spike in provisions impacted their profitability.
The new methodology to calculate base lending rate effective from April 2016 could further dent the NIIs, says Vaibhav Agrawal of Angel Broking, who believes most NPA additions/provisioning will be done by the June 2017 quarter and the pace of incremental slippages will moderate. Hence, going forward, with credit growth stabilising at 11 per cent despite weak corporate demand, capital infusion appears critical for PSBs to combat the provisioning pressures and see any significant improvement in credit growth.