Indian Bank's gross NPA could peak at 6%: India Ratings

Bank had reported GNPAs of 4.4% in March 2015, up from 3.67% in March 2014

Government-owned Indian Bank’s gross non-performing assets (GNPAs) might rise to around six per cent of the total in the medium term, says India Ratings.

The Chennai-based lender had reported GNPAs of 4.4 per cent in March, up from 3.7 per cent in March 2014 and 3.3 per cent in March 2013.

T M Bhasin was heading the bank as managing director and chief executive officer (MD & CEO) till June 10, before moving to the Central Vigilance Commission as a vigilance commissioner. Mahesh Kumar Jain, executive director, is holding additional charge as MD & CEO.

India Ratings said though NPA accretion tapered in 2014-15 (which ended on March 31), stress in some large corporate accounts could push the gross NPA ratio higher. Over the medium term, these are expected to peak around six per cent.

For public sector banks (PSBs) as a group, gross NPAs had gone up to 5.2 per cent in March from 4.7 per cent a year before. They were at 3.8 per cent in March 2013. The stressed assets of PSBs have been rising with the sluggishness in domestic growth and a general slowing in the global economy's recovery. Indian Bank’s long-term issuer rating is 'AA+, with a stable outlook'. The ratings show it is consistently above average on capital buffers and in a comfortable liquidity position compared with peers, India Ratings said. The capital adequacy ratio in March was 12.86 per cent, with tier-I capital at 10.6 per cent.

The ratings are constrained by weakening profitability and a modest franchise due to regional concentration.

  The restructured loan book was 9.7 per cent of the total at end-March, higher than most peers. Around 41 per cent of the incremental restructuring in FY14 came from state power distribution companies; the power sector comprises 52 per cent of the restructured book. The bank has reduced its exposure to infrastructure and other stressed sectors. So, incremental restructuring could get slower.

India Ratings warned that negative rating action could result from a significant erosion of the capital buffers, due to consistent decline in asset quality. The crucial aspect for rating would be the performance of restructured assets.

Performance

The bottom line has been under pressure for two years. Net profit declined 13.3 per cent to Rs 1,005 crore in 2014-15 from Rs 1,159 crore in 2013-14. It was Rs 1,581 crore in 2012-13.

Another indicator of efficiency, the return on assets, has also been weak for two years. It was 1.02 per cent in FY13, a rare feat among PSBs. However, this came down to 0.67 per cent in FY14 and to 0.54 per cent in FY15, show finance ministry data.

The rise in NPAs has impacted the margins, as the bank had to reverse part of the interest income booked for loans which turned into these. The net interest margin fell to 2.6 per cent for FY15, from 2.7 per cent in FY14 and three per cent in FY13.

Profitability was also impacted by higher operating costs, led by revisions in pay and a relatively low proportion of fee income, India Ratings said.

The bank plans to focus more on high-yielding agriculture and small business loans. However, the high proportion of restructured assets and increasing slippage could keep yields under pressure over the medium term.