Private sector banks see an uptick in bad loans in Q1

Other income, healthy NIMs get thumbs up from analysts

Private banks' earnings in the first quarter (April-June) of 2015-16 were mainly in line with analysts' expectations. The lenders witnessed slight pressure in asset quality in the first quarter, however the rise in bad loans is not alarming, experts believe.

Most private sector lenders including HDFC Bank, Axis Bank, YES Bank, Federal Bank and Kotak Mahindra Bank reported an increase in non-performing assets (NPAs).

"There was little bit of deterioration that was seen in asset quality but nothing that was not expected. This is because some sectors that had been under stress continue to remain so and since there is no real improvement in on-ground activity this was expected," said Vaibhav Agrawal, vice-president, research for banking, at Angel Broking.

However, ICICI Bank was an outlier and reported an improvement in asset quality in the quarter ended June. On a sequential basis, the percentage of gross NPAs to gross advances declined to 3.68 per cent in the June quarter compared with 3.78 per cent in the March quarter. However, it was up compared with Q1of FY15, when it stood at 3.05 per cent.

Similarly, per cent of net NPAs to net advances also improved to 1.58 per cent in Q1of FY16 compared with 1.61 per cent in Q4of FY15.

The positive surprise in the earnings came on other income which was better than expected, considering that the Reserve Bank of India (RBI) had reduced the repo rate by 25 basis points (bps) (bps)on June 3, after which bond yields rose by about 22 bps thus impacting the treasury income of the banks. In the April-June period, bond yields inched up by about 30 bps. As a result, this quarter, treasury income which had been a cushion for bank earnings in the last three-four quarters was not expected to remain.

Despite this, most private banks have reported a double digit increase in other income led by treasury income and fee income growth. For instance, HDFC Bank's other income led by treasury gains grew 33 per cent to Rs 2,461.9 crore in the April-June quarter compared with Rs 1,850.6 crore in the corresponding quarter last year. Similarly, YES Bank's other income increased 31.8 per cent year-on-year to Rs 545 crore in the quarter ended June. Even Axis Bank's other income improved 36 per cent mainly led by non-core trading income.

Apart from other income, even the net interest margin (NIM), the difference between interest earned on loans and that paid on deposits, was expected to be under pressure as banks had increased their base rate in the first quarter of this financial year.

Several banks had reduced their base rate by 15-30 bps in the last few months.

However, despite this most lenders posted a healthy NIM. This is because the lenders had started reducing the deposit rates some time before they started reducing their lending rates and as a result the margin was well protected, explain analysts.

For instance, ICICI Bank, the country's largest private sector lender, saw margins improve to 3.54 per cent in Q1 of FY16 from 3.40 per cent in Q1 of FY15. Even Axis Bank that had cut its base rate by 30 bps in the April-June quarter, witnessed no change in its margins at 3.81 per cent, both sequentially as well as year-on-year basis.

"Even though the reduction in base rate came in first quarter the full impact of it can only be seen in the July-September quarter. This is because most customers would have had paid the loan in one month and then base rate reduction would have had happened later. So the NIMs have been better than expected this quarter but we will watch out for it in the second quarter," said Saday Sinha, banking analyst, Kotak Securities.