PSBs outperform private peers yet again as quarterly profits hit new high

The combined net profit of listed universal banks crossed Rs 1 trillion for the first time in a quarter, in December, with three banks contributing at least 50% to it

Before we discuss their profits, let us first look at the quality of assets that plays a key role in making banks profitable.

 

Only three of the 30 listed universal banks had over 1 per cent net non-performing assets (NPAs) in the December quarter. All three belong to the private sector. And 18 of the 30 had net NPAs of less than half a per cent.

 

The five banks with the lowest net NPAs – as a percentage of their assets – were Bank of Maharashtra and Indian Bank (0.15 per cent each), IDBI Bank Ltd (0.18 per cent), Karur Vysya Bank Ltd (0.19 per cent), and Tamilnad Mercantile Bank Ltd (0.20 per cent). Yet another bank had less than a quarter per cent of net NPAs – Indian Overseas Bank (0.24 per cent).

 

Among large banks, State Bank of India (SBI), Punjab National Bank (PNB), Canara Bank, in the public sector, and HDFC Bank Ltd, ICICI Bank Ltd, Axis Bank Ltd, and Kotak Mahindra Bank Ltd, in the private sector, had less than half a per cent of net NPAs. Recovery of bad loans, a drop in fresh slippages, and the sale of stressed assets to asset reconstruction companies have contributed to the drop in net NPAs.

 

Meanwhile, only two banks – both private – had less than 1 per cent gross NPAs: Karur Vysya Bank (0.71 per cent), and Tamilnad Mercantile Bank (0.91 per cent). Besides these, 11 had gross NPAs of less than 2 per cent. Among these, the large banks included SBI, HDFC Bank, ICICI Bank, Axis Bank, and Kotak Bank.

 

At the other end of the spectrum, IndusInd Bank Ltd, DCB Bank Ltd, and Dhanlaxmi Bank Ltd had net NPAs upwards of 1 per cent. Three private banks and two public sector banks (PSBs) had gross NPAs of 3 per cent or more: IndusInd Bank (3.56 per cent), Bandhan Bank Ltd (3.33 per cent), PNB (3.19 per cent), Union Bank of India (3.06 per cent), and Jammu & Kashmir Bank Ltd (3 per cent).

 

In absolute terms, the industry’s gross NPAs dropped 12.44 per cent year-on-year (Y-o-Y) in the December quarter to Rs 3,84,258 crore. Quarter-on-quarter (Q-o-Q) – in the December over September quarter – they fell 3.6 per cent. On both parameters, PSBs fared better than private banks. After provisioning, the net NPAs dropped 11.33 per cent Y-o-Y, and 2.12 per cent Q-o-Q, to Rs 85,356 crore. Here, too, PSBs demonstrated sharper reduction than their private peers.

 

The banking sector has clearly come a long way. At its peak, in March 2018, the gross NPAs of all scheduled commercial banks were around Rs 10.36 trillion. At the time, the industry’s net NPAs were around Rs 5.2 trillion.

 

Before analysing the top and bottom line, let’s look at two key metrics that have a bearing on a bank’s profit: Net interest margin (NIM), loosely the difference between the cost of funds and earnings; and the pile of low-cost current and savings accounts (Casa).

 

In December, most banks recorded a rise – though marginal in many cases – in their NIM, Q-o-Q. However, Y-o-Y, barring a few, almost all showed a drop in NIM. Yes Bank Ltd, Federal Bank Ltd, Dhanlaxmi Bank, and Tamilnad Mercantile Bank recorded a rise in NIM – both Y-o-Y and Q-o-Q. 

 

The group of private banks enjoyed higher NIM than PSBs. Only four PSBs had over 3 per cent NIM in December (Bank of Maharashtra, Indian Overseas Bank [IOB], Uco Bank, and Indian Bank). In contrast, barring three, all private banks had more than 3 per cent NIM. Bandhan Bank Ltd led the group (5.9 per cent), followed by IDFC First Bank Ltd (5.76 per cent). ICICI Bank, Kotak Mahindra Bank, RBL Bank Ltd, and Tamilnad Mercantile Bank had more than 4 per cent NIM.

 

In terms of Casa, more banks registered a drop than rise. Historically, PSBs enjoy higher Casa than private banks, and that trend continues. Overall, IDFC First Bank had the highest Casa in December (51.6 per cent), followed by Bank of Maharashtra (49.54 per cent), Central Bank of India (47.13 per cent), IDBI Bank (44.6 per cent), J&K Bank (44.1 per cent), Kotak Mahindra Bank (41.3 per cent), and IOB (40.8 per cent). None other touched 40 per cent.

 

Of course, in isolation, NIM and Casa don’t give us the full picture of a bank’s operational efficiency. For instance, unsecured loans always fetch higher returns than secured loans, but run the risk of creating bad assets. Similarly, one bank is offering 2.5 per cent on savings bank accounts, while another is offering 6 per cent, or even more. Then, a few banks are offering monthly interest payment, while others pay it quarterly. Similarly, money kept in current accounts typically doesn’t earn any interest, but a few banks are finding ways to reward such accounts. As the fight for raising deposits intensifies, the rules are being rewritten.

 

For the first time, the industry crossed Rs 1 trillion net profit in a quarter. The combined net profit of listed universal banks in the December quarter was Rs 1,00,056 crore – 10.67 per cent higher Y-o-Y and 3.8 per cent higher Q-o-Q. Just three of the 30 listed banks – SBI, HDFC Bank, and ICICI Bank – contributed at least 50 per cent of the industry’s profit! If you add another five (Axis Bank, Canara Bank, PNB, Bank of Baroda, and Union Bank of India), eight of them accounted for around 76 per cent of the net profit.

 

PSBs have fared better than private banks – registering 18.28 per cent rise in net profits Y-o-Y and 6.37 per cent rise Q-o-Q versus 3.29 per cent and 0.85 per cent rise in the net profits of private banks. Also, all PSBs have registered higher net profits, both Y-o-Y and Q-o-Q, while among private banks, there are at least two instances of a drop in net profit, both Y-o-Y and Q-o-Q.

 

Net interest income, or NII, the mainstay of a bank’s profit, at Rs 2.18 trillion, is 4.79 per cent higher Y-o-Y and 3.78 per cent higher Q-o-Q. On this metric, both private banks and PSBs are almost on a par, but when it comes to the other income, which includes fee income and profits from treasury operations, PSBs have done far better. Overall, for the industry, other income grew a little over 21 per cent Y-o-Y and 3.4 per cent Q-o-Q, to Rs 91,196 crore.

 

What has also contributed to the net profit is lower provision for bad debt. It dropped close to 7 per cent, Q-o-Q, but rose to about 15 per cent Y-o-Y. PSBs seem to be more conservative than private banks when it comes to provisioning for bad debts.

 

The banking sector’s good run continues, and PSBs are making it a habit to outperform private banks. The industry’s credit growth is on track, and here as well, PSBs have an edge over private banks since in relative terms, they have lower credit-to-deposit ratio. This means, they can be more aggressive in pushing for credit growth, leading to higher NII and profits.

 

With the rate-cut cycle over, and the banking industry’s deposit growth lagging credit growth (12.5 per cent versus 14.6 per cent, Y-o-Y, as on January 31), all eyes will be on how banks manage liability and grow their balance sheets in a profitable way, while keeping the quality of assets intact.   

The writer is an author and senior advisor to Jana Small Finance Bank Ltd.

His latest book: Roller Coaster: An Affair with Banking.

To read his previous columns, log on to www.bankerstrust.in.

X: @TamalBandyo