PSBs disappoint majorly in Dec quarter

Many banks cut lending to customers perceived as risky

Public sector banks (PSBs) have put up a dismal show in the quarter ended December 2015. Seven of the 18 PSBs that have announced numbers have posted a net loss, including Bank of India (BoI), Indian Overseas Bank and Dena Bank, among others. Of the rest, six - State Bank of India (SBI), Punjab National Bank (PNB), Union Bank, Indian Bank, United Bank and State Bank of Mysore - have seen a sharp fall (between 59 to 93 per cent) in their net profit on a year-on-year basis (y-o-y). A sharp rise in provisioning (largely for bad loans) for most of these banks is the key reason behind deteriorating profitability.

Notably, the Reserve Bank of India had mandated all banks to step up provisions for some 150 borrowers, in an effort to attain a uniform recognition of bad loans across the board. Most banks did accelerate provisions and non-performing asset (NPA) recognition in the quarter, similar increase is expected for most of these banks in the March quarter as well. Higher provisioning, in turn, has impacted net interest income (NII) for these banks. Half of these banks have witnessed a fall in this metric on account of reversal in interest income while NII of another two banks has remained flat. Many banks have also seen other income rise faster, aiding their bottomlines.

The trend on loan growth, though, remained mixed with SBI reporting 13 per cent loan growth (its highest in past few quarters) and PNB and Union bank reporting eight per cent and 5.8 per cent growth, respectively.

Banks with weaker capitalisation, such as BoI, though witnessed a fall in loan growth in the quarter. The reason for this is apparent as many banks curtailed lending to customers they perceived risky and due to the weak economic environment. As a result, the growth in core fee income hasn't been impressive for most banks.

Provisions as well as gross NPA ratios surged sharply for most PSBs in the quarter, both sequentially as well as on a year-on-year basis. Seven banks including Oriental Bank, Union Bank, Dena Bank, PNB, Indian Bank, amongst others saw their provisions more than double sequentially (100-423 per cent). Bank of Maharashtra is the only exemption and has witnessed a fall in its provisions. Analysts though believe it is a one-off phenomenon for the bank and not a structural story. As a result, most banks' gross NPA ratio expanded between 34 and 301 basis points sequentially. Indian Overseas Bank (IOB) now has the highest gross NPA amongst the 18 PSBs at 12.64 per cent of their loans, followed by Dena Bank (9.85 per cent) and United Bank (9.57 per cent).

Vaibhav Agrawal, banking analyst at Angel Broking says, "Most of the large NPA additions/provisioning will be done latest by the June quarter. A big chunk of the pain will then be in the base. The pace of incremental slippages will moderate going forward." Continued stress in metals and infrastructure sectors remains a key monitorable as far as asset quality is concerned. Vaibhav Agrawal believes the commodity crash is good for India and can be used to build infrastructure and housing, which in turn will boost credit demand. Well capitalised PSBs such as SBI will be better placed to benefit in such a situation.

Analysts believe the focus will shift on capital infusion from the government in PSBs. Any announcement on this front in the upcoming Budget will be a key positive.