High credit costs, low interest income hit PSBs' bottomline

Moreover, the scale of slippages (like restructured loans becoming bad assets) was higher in many public sector banks

Public sector banks reported weak performance in the fourth quarter (Q4) because of low growth in interest income rate and high credit costs, despite State Bank of India and ICICI Bank performing well.

For 23 listed public sector banks that have declared their results, the net profit shrunk by 17.57 per cent to Rs 8,009 crore from Rs 9,716 crore in Q4 of FY14, according to Capitaline data.

Out of them, 10, including Punjab National Bank, Bank of Baroda and Union Bank, reported a drop in net profit. Punjab and Sindh Bank and Oriental Bank of Commerce reported net loss in the quarter.

Public sector bank executives said the low credit growth has affected books. The low credit expansion meant less earning from interest income. Also non-performing accounts made a dent into interest income.

The growth in net interest income (NII) moderated to 5.5 per cent in Q4 of Fy15 down from 11.41 per cent seen for January-March 2014, according to Capitaline data.

Vibha Batra, co-head financial sector ratings, ICRA said the scale of slippages (like restructured loans becoming bad assets) was higher in many public sector banks. This is hit the interest income as banks had to reverse interest income which was booked earlier for bad loans.

These are not visible since there is separate accounting entry for such reversal.

Solace from downward rate cycle

While interest income took hit, softening of interest rates in system brought some relief to  banks. The earnings from treasury, which is captured in the other income, grew by 25.4 per cent in fourth quarter Anuj Jain, banking analyst, CARE Ratings said the downward rate cycle helped to book treasury profits, adding to bottomline.

The Reserve Bank of India reduced the repo rate, key policy rate, twice in the quarter by 25 basis points each. These rate cuts were out of policy cycle for giving push for economic growth and banks to reduce lending rates.

Asset quality worries remain

Throughout the FY15, the government took steps — clearing  policy hurdles and giving clearances to lessen woes and encourage corporates to commence investments. But it hardly had shown beneficial effect on the ground. The debt seating on the corporate balance sheets remains high.

Many larges restructured loans slipped into non-performing category. The gross NPAs of 23 state-owned banks grew by 20 per cent to Rs 2, 37,009 crore at end of March 2015 from Rs 1, 96,636 crore in March 2014.

The asset quality pressure on private banks have been lesser compared to PSBs. However, in the fourth quarter of the last financial year, bad loans did zoom for some big private lenders as well. For instance, ICICI Bank’s gross NPAs increased to Rs 15,095 crore as on March 31, 2015, compared with Rs 10,505 crore a year before.

The effect of bulging bad loan book has been the high credit costs — amounts set aside for bad loans in line with regulatory norms — in the fourth quarter FY15. The provisions and contingencies grew by 19 per cent to Rs 24,492 crore in the reporting quarter.

The asset quality expected to remain under pressure in the current financial year leading to elevated credit costs, Batra of ICRA said.

International brokerage Nomura Securities said the asset quality beat muted expectations but large stressed accounts are being rescheduled. The investors should not to be carried away by better impairment guidance as we believe impairment is becoming less meaningful.