Top private banks' Q4 profits nearly halve on Covid-19 provisioning

The pressure on earnings will continue, say experts

A look at the March 2020 quarter (Q4) numbers of top private sector banks — HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank, and IndusInd Bank — shows that Covid-19 related provisioning has dented their profits.

On a cumulative basis, the Covid provisioning at Rs 8,678 crore has shaved off 45 per cent of their profit before tax (PBT). In other words, had these banks not made the provisions, their combined reported PBT of Rs 10,792 crore would have been higher at Rs 19,740 crore.

Due to a likely deterioration in borrowers’ credit profile, banks were mandated to make provisions in Q4. The Reserve Bank of India (RBI) had earlier announced a three-month moratorium for repayments due between March and May (now extended to August) and had asked banks to make at least 10 per cent provisions for such accounts, which were overdue as of March 1.

Notably, many of these banks have made a higher provision based on their own assessment of the impact due to the moratorium and subsequent lockdown. According to the data, Axis Bank and ICICI Bank consumed 37-59 per cent of their operating profit for Covid-19 provisioning, while the figure is 24 per cent in case of Kotak Mahindra Bank and 10-12 per cent for IndusInd Bank and HDFC Bank. As a proportion of advances, the Covid-19 provisioning of these lenders stood at 14-61 basis points in Q4.

 

Anil Gupta, head of financial sector ratings at Icra, says: “Banks have taken prudent step by making provisioning towards Covid-19, which had sharp impact on their bottom line.” Gupta, however, believes the pressure due to provisioning would remain high in the coming quarters and its impact on banks’ earnings could increase. This is due to uncertainty on the stress that could emerge because of the lockdown’s impact on borrowers’ ability to repay loans as well as moratorium by the regulator. Banks’ loan book under moratorium is expected to increase in the coming quarters, as borrowers may choose to conserve liquidity (cash) amid rising uncertainties.

Prakash Aggarwal, head of financial sector at India Ratings, shares a similar view: “While the proactive provisioning by banks is in the right direction, more will be needed, given the way the pandemic is moving and extension of moratorium.”

Analysts at Edelweiss estimate that lenders such as Axis Bank, Kotak Mahindra Bank, and ICICI Bank have 25-30 per cent of their loan book under moratorium.

Looking at the situation where income levels of individuals are getting impacted either through salary cuts or job losses, and the likely rating downgrade of key industries/companies, the asset quality concerns are justifiable.

Credit Suisse recently increased its credit cost estimates by 20-60 per cent for banks, due to the lockdown and the moratorium extension.

The silver lining, however, is private banks have higher and relatively better provision coverage ratio, say experts. The foreign brokerage estimates that Indian banks would need to raise $20 billion in the next 12 months, of which $13 billion would be required by public-sector banks.

Against this backdrop, the position of public sector banks’ moratorium book, provisioning for Covid-19 stress and management commentary would be key to watch.