Lower rating likely for weak govt banks, warns Icra

Falling core profitability; weak asset quality key concerns

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Declining core profitability, coupled with a sharp rise in the stressed assets portfolio could lead to a rating revision (read downgrade) or change in outlook for weak public sector banks, rating agency Icra has warned.

Banks' asset quality has been deteriorating sharply. The overall gross non-performing assets (NPAs) of lenders swelled to 3.8 per cent in June this year from 3.3 per cent in March.

The growth in NPAs was primarily due to slippages in public sector banks. Fresh NPA generation for the banks rose sharply to 4.2 per cent in the first quarter of the current financial year (FY14), 120 basis points (bps) higher than that of FY13, according to Icra Research.

The rating agency added there was also a drop in core profitability of the banks. There was a 40 bps decline in core profit before tax (excluding profit on sale of investments). It dropped to 0.97 per cent in the first quarter of FY14 from 1.37 per cent in the corresponding quarter of the previous financial year. It was 0.97 per cent in the fourth quarter of FY13.k

Public sector banks' core profit before tax in per cent terms is estimated to have dropped to 0.7 per cent in the first quarter of FY14 from 1.2 per cent in the year-ago period. It was 0.6 per cent in the fourth quarter of FY13.

The profit before tax came down due to lower net interest margins, provisions for wage revisions and elevated credit costs. For private banks, it remained stable at 2.1-2.3 per cent levels in the corresponding period.

With the falling profitability and deteriorating asset quality, there may be rating action especially in case of public sector banks, said Vibha Batra, senior vice-president of Icra, in conference call.

A weak macro environment, large rupee depreciation, vulnerability of infrastructure projects and rising yields will have a significant bearing on the earnings and asset quality of the banks, Icra noted.

The gross NPA of public sector lenders could rise from 4.2 per cent in June 2013 to 4.8-5 per cent level by March 2014. The gross NPA for banking system could rise further to 4.2-4.4 per cent by March 2014 from 3.8 per cent as on June 30.

A BLEAK PROGNOSIS

* Weak public sector banks face rating downgrade, outlook revision

* Banks bogged down by deteriorating asset quality, rising NPAs

* Overall gross NPAs shot up 120 basis points to 4.2 per cent in Q1 of FY14

* Public sector lenders' PBT fell to 0.7 per cent in the first quarter of FY14 from 1.2 per cent in the year-ago period