Provisioning dents PAT for private banks despite high interest income

Net profit fell 1.6% as provision accounts for 44 per cent of private banks' operating profit

Net profit of 17 private sector banks in the September quarter (Q2) fell 1.6 per cent year-on-year to Rs 107.1 billion on account of higher levels of provisioning and contingencies, which on an aggregate grew 8.6 per cent year-on-year.

In February this year, the Reserve Bank of India (RBI) issued new non-performing asset (NPA) guidelines, subsuming all previous mechanisms that had been introduced since 2015.

As a result of uniform guidelines for recognition and resolving ‘bad-loans’ or ‘defaults’, many top players had to raise their provisioning levels compared to last year.

The private banks, like their public sector counterparts, witnessed mark-to-market losses on the bond portfolio, and increase in (bad loan) slippages, on a year-on-year basis, weighed on provisioning.

For these private banks, provisioning and contingencies in Q2 FY2019 accounted for 44 per cent of the aggregate operating profits of these banks. While HDFC Bank’s provisioning grew 23 per cent year-on-year, Kotak Mahindra Bank, IndusInd Bank and Federal Bank had to substantially raise the level of provision by around 63 to 110 per cent, against any future NPAs.

On a positive note, ICICI Bank and Axis Bank posted decline in provisioning and contingencies by 11.3 per cent and 6.8 per cent, respectively. This ended up restricting the rise in overall provisioning of all private banks in the present analysis, while YES Bank reported over two-fold year-on-year rise in provisioning during the quarter.

In fact, share of these two banks in the overall provisioning of private banks drifted northwards to 54 per cent in Q2 from 65 per cent a year back.

An analysis of these private lenders shows that the aggregate net interest income (NII) rose by 17.7 per cent from Rs 314.2 billion in Q2 FY2018 to Rs 369.7 billion as of Q2 FY2019. NII is a difference between interest earned and expensed.

This was led by good growth in advances as the top banks reported a 12 to 32 per cent year-on-year rise in advances during the second quarter of fiscal 2019.

With nearly half of the public sector banks (PSBs) under prompt corrective action (PCA), which restricts many activities, including branch expansion and corporate lending, private banks seem to have taken advantage of this.

Though personal loans and credit card business drove strong advances growth, banks such as IndusInd Bank, YES Bank and HDFC Bank, among others, clocked healthy growth in their corporate or wholesale lending during the quarter.

This indicates that private sector banks’ share of corporate lending is increasing.

As the Reserve Bank of India (RBI) hiked the repo rate twice this year, some banks are facing the heat of higher cost of funds, which limits the upside in the NII and on the net interest margin (NIM).  

Consequently, most large private lenders either experienced almost flattish or a contraction in NIM on a yearly basis. NIM is the NII as a percentage of average interest-earnings assets/advances.

During the first half of this fiscal year, many private sector banks saw double-digit growth in their topline as several regulatory developments were put in place to improve practices by these lenders.

Analysts, however, say that the financial sector is entering a period of crunch as liquidity issues, asset-liability mismatches and corporate lending risks swell.

Gross NPAs either remained flat or went down on a sequential basis for most of these players, barring YES Bank. Notably, ICICI Bank and Axis Bank surprised the Street on a sequential improvement in asset quality as GNPA levels of the two contracted by around 25-27 basis points in Q2 as compared to the previous quarter.

On a sequential, quarter-to-quarter basis, the performance of private sector banks improved as there was an improvement in asset quality with lower gross and net NPAs, a rise in net profit of 7.9 per cent, a 9.6 per cent reduction in provisioning and a 5.4 per cent rise in NII.

Exposure to IL&FS related accounts could dent earnings potential of some banks such as YES Bank (exposure Rs 26.6 billion), that have not made provisions yet against the infrastructure-financiers’ bad loans and possible future defaults. IndusInd Bank, on the other hand, created contingent provision towards the risk.

Analysts at CLSA said, “We lower our earnings to factor in haircuts for exposure to IL&FS’ holdco (project).” In case of YES Bank, too, a 10-basis points expected rise in gross NPAs due to IL&FS exposure would weigh on earnings, say analysts.

IL&FS’ bank accounts with most banks were classified as ‘standard accounts’ as recently as the end of September.

Many analysts downgraded the earnings of banks that are exposed to IL&FS and its related accounts for the potential risk of default.