Mid and small size PSBs report 19.6% drop in net profit in Q1

Tepid loan growth, provision for NPAs, bond portfolio make dent

Mid and small-size public sector banks (PSBs) posted a 19.6 drop in net profit in the quarter ended June, on tepid loan growth, provisions for bad loans and erosion in value of the securities portfolio.

The group of 18 banks posted a combined net profit of Rs 3,180 crore in April-June, from Rs 3,957 crore a year before, according to BS Research data.

Vinod Nair, head-fundamental research, Geojit BNP Paribas Financial Services, said balance-sheet restructuring had affected the performance. Interest income has been under pressure, partly due to the impact of reduction in the base rate that hits earnings immediately.

The analysis does not cover performance of four large PSBs — Bank of Baroda, Bank of India, Canara Bank and Punjab National Bank. The two other large PSBs, State Bank of India and IDBI Bank, are yet to announce results.

Net interest income for the 18 banks in the quarter grew only 5.7 per cent to Rs 19,505 crore from Rs 18,453 crore. Executives said the financial year’s first quarter was always subdued for credit growth. This time, the effect was more pronounced due to weak corporate loan demand.

It has been low growth due to the tepid uptake in credit, limiting income from loans, Plus, with rising slippages, part of interest income was reversed for non-performing loans. Also, the cut in base rates made a dent in interest income. Following a 75 basis point reduction in the repo rate by the Reserve Bank, banks reduced their base rate, a benchmark for pricing loans, up to 30-35 bps.

Other income comprising fees, commissions and earnings from treasury grew 10.2 per cent to Rs 63,189 crore.

Analysts said fees and commissions were closely tied to pace of credit offtake. Since loan growth was dull, the income from these two streams expanded at a slow pace.

Income from the treasury book came under pressure due to hardening on bond yields. They had to set aside higher amounts for erosion in the value of bonds, which form the bulk of the treasury portfolio. The value declines when yields begin to move up. The yield on the benchmark 10-year paper rose about 30 bps to 8.04 per cent by end-June from 7.73 per cent at end-March.

Gross non-performing assets (NPAs) grew 28.5 per cent to Rs 127,994 crore by end-June. Net NPAs, bad loans for which provision is yet to be made, grew 24.2 per cent to Rs 76,884 crore.