Q1 review: Provisions cut into profit of pvt banks, asset quality a problem

IIt was a mixed bag for private banks in the first quarter (Q1) of 2018-19 (FY19). While ICICI Bank posted its first-ever loss and Axis Bank’s net profit reduced to half as against the previous year’s, other private banks showed a healthy trend. 

Provisioning for bad loans continued to weigh on the banks’ profitability along with losses in the bond portfolio as well as slower income growth.

According to a CARE Ratings report, the total net profit of private sector banks declined 18.8 per cent year-on-year (YoY) in the June 2018 quarter, against a rise of 13.3 per cent YoY in the previous year. While both net interest income and other income grew during the recently concluded quarter, the pace of growth was slower than last year’s.

Asset quality, in terms of gross non-performing asset (NPA) ratio, for most private players during the quarter showed marginal improvement sequentially. However, it was still significantly higher over the year-ago quarter levels.

Total gross NPA ratio for private banks during the quarter stood at 4.5 per cent, against 4.06 per cent in the April-June 2017 period (Q1FY18).

“Gross NPAs increased, however, at a comparatively lower rate in Q1FY19, compared to Q1 of 2017-18 (FY18). This could be due to lower incremental NPAs being generated. However, it is still not clear if all legacy NPAs have been recognised by all banks,” said CARE ratings.

The private sector banks with the most asset quality trouble, ICICI Bank and Axis Bank, said this quarter’s slippages were the lowest since the past few years. “A large part of the NPA recognition is done and the incremental slippages have been moderate. Banks may also see significant recoveries from the National Company Law Tribunal (NCLT) process,” said Karthik Srinivasan senior vice-president, Icra.

The banks also saw elevated provisions during the quarter on account of bad loans and mark-to-market (MTM) losses. All the banks made full provision for MTM losses in the June quarter itself and did not avail of the Reserve Bank of India’s (RBI’s) dispensation of spreading it across four quarters. The MTM losses are reflecting in slow growth in other income in the June quarter.

Provisions by private banks grew 62 per cent in Q1FY19, against 23 per cent in Q1FY18. The provision coverage ratio also improved from previous levels to above 60 per cent across most private sector banks.

“According to the RBI’s timelines, the NCLT list 1 and 2 will be resolved by this calendar year or 2019-20 at the latest. The banks have provided over 50 per cent on these accounts and unless the haircut is greater than the provisions, banks are likely to see write-backs,” said Srinivasan.

The bank’s profits and net interest margins (NIMs) were supplemented by significant recoveries of bad loans and the resolution of Bhushan Steel. Going forward, the banks’ guided towards pressure on NIMs. While interest income grew by 17 per cent year-on-year for the quarter, interest expenses grew by 19 per cent.

Most banks, including HDFC Bank, IndusInd Bank, RBL Bank, and Federal Bank, said they saw corporate loan growth of over 20 per cent from the previous year’s quarter. However, ICICI Bank and Axis Bank saw a corporate loan growth of 4.9 per cent and 6 per cent, respectively. Most private banks are cautious on the corporate lending front, focusing on more quality-led growth. The new loans are mostly to corporates rated ‘BB’ and above, said the banks. Banks are also deliberately going slow on some sectors to prevent risk concentration. However, retail growth continued to be strong across the banks supplemented by a fast growth of unsecured loans, which could prove to be an area of concern, going ahead. 

Srinivasan said the quality of incremental lending by banks would be a factor to watch out for in the coming quarters.