Covid-19 related provisioning knocks off 45% of top private banks' profits

A look at Q4FY20 numbers of top private-sector banks such as HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank and IndusInd Bank, shows that Covid-19 related provisioning has dented their profits.

On a cumulative basis, Covid-19-related provisioning at Rs 8,678 crore has shaved off 45 per cent of their pre-tax profit. In other words, had these banks not made the provisions, their combined reported pre-tax profit of Rs 10,792 crore would have stood at Rs 19,740 crore.

Due to a likely deterioration in borrowers’ credit profile, banks were mandated to make provisions in Q4. The Reserve Bank of India (RBI) had earlier announced a 3-month moratorium for repayments due between March to May (now extended to August) and had asked banks to provide at least 10 per cent for such accounts, which were overdue as of March 1, 2020 and have availed moratorium.

Many of these banks have made a higher provisioning based on their own assessment of the impact due to the moratorium following the Covid-19 outbreak and subsequent lockdown. According to data, Axis Bank and ICICI Bank consumed 37-59 per cent of their operating profit for Covid-19 provisioning, while the figure is 24 per cent in case of Kotak Mahindra Bank and 10-12 per cent for IndusInd Bank and HDFC Bank. As a proportion of advances, the Covid-19 provisioning of these lenders stood at 14-61 basis points in Q4.

“Banks have taken prudent step by making provisioning towards Covid-19, which had sharp impact on their bottom-line,” said Anil Gupta, head of financial sector ratings at ICRA. He, however, believes that the provisioning pain would remain elevated in the coming quarters and its impact on banks’ earnings could widen. This is due to uncertainty on the stress that could emerge because of the lockdown's impact on borrowers' ability to repay loans as well as the moratorium by the regulator. Banks’ loan book under the moratorium is expected to grow in the coming quarters, as borrowers may choose to conserve liquidity (cash) amid rising uncertainties.

Prakash Aggarwal, head-financial sector ratings, at India Ratings, shares a similar view. According to him, “While the proactive provisioning by banks is in the right direction, more will be needed given the way the pandemic is moving and the extension of the moratorium.”

Analysts at Edelweiss estimate that banks like Axis Bank, Kotak Mahindra Bank and ICICI Bank have 25-30 per cent of their loan book under the moratorium.

In the present situation, when income levels of individuals are getting impacted, either through salary cuts, or job losses, and a rating downgrade of key industries/companies is likely, concerns on asset quality are justifiable.

Credit Suisse also recently increased its credit cost estimates by 20-60 per cent for banks, due to lockdown and moratorium extension.

The silver lining, however, is that private banks have higher and relatively better provision coverage ratio, say experts. The foreign brokerage estimates that Indian banks would need to raise $20 billion in the next 12 months, of which $13 billion would be required by public-sector banks.

Against this backdrop, the position of public-sector banks’ moratorium book, provisioning for Covid-19 stress and management commentary would be critical.