The vanishing NPAs

OVERVIEW

Banks are back on the high growth path with healthier bottomlines. But public sector banks "� the king of the heap "� faltered on profits, reports B G Shirsat

First the good news. After more than a decade, the Kolkata-based United Bank of India (UBI) paid dividends to its shareholders after reporting Rs 204.57 crore net profit. The Chennai-based Indian Bank also followed suit, riding high on its Rs 500 crore-plus bottomline.

The net and gross non-performing assets (NPAs) as a percentage of advances have also come down for all commercial banks. In the public sector, only Dena Bank now has over 3 per cent net NPAs. Four others "� Central Bank of India, Bank of Maharashtra, Punjab & Sind Bank and Uco Bank "� have 2-3 per cent NPA levels. As many as 13 public sector banks have less than 1 per cent NPAs.

Only three banks' net NPAs have risen during the year, that too marginally. For instance, Punjab National Bank's net NPA rose from 0.20 per cent to 0.29 per cent and that of Vijaya Bank's from 0.59 per cent to 0.85 per cent. In the case of State Bank of Indore, the net NPA level has almost doubled from 1 per cent to 1.83 per cent, but on a very low base.

The picture is more or less similar in the private banking segment. Seven of them have less than 1 per cent net NPAs and another eight between 1 per cent and 2 per cent. Development Credit Bank has the highest level of bad loans at 4.50 per cent. At least five private banks, including IndusInd Bank, have more than 2 per cent NPAs.

While bad loans indicate the health of the banks, the bottomline growth has actually signalled a upturn in their performance. Buoyed by retail loan growth, the banking sector posted 16.84 per cent growth in net profit against 9.14 per cent decline in 2004-05, which was marked by a reversal in the interest rate cycle.

Now the bad news. Public sector banks remained a drag with just 5.57 per cent growth in net profit. In contrast, private banks' average net profit rose by over 41 per cent and that of foreign banks by 54.76 per cent.

Nine public sector banks reported a drop in net profits and, in some cases, the slide was very sharp. At least five of them saw a second successive drop in net profit growth in as many years.

These are Andhra Bank, Bank of Maharashtra, Central Bank of India, Oriental Bank of Commerce, UCO Bank, United Bank India, Union Bank, Vijaya Bank and State Bank of Bikaner & Jaipur.

For some, the drop in net profit growth was very sharp. For instance, Bank of Maharashtra's net profit was down from Rs 177 crore in 2004-05 to Rs 51 crore in 2006-06.

In the case of Vijaya Bank, it was down to Rs 127 crore from Rs 381 crore. Central Bank and United Bank of India have also reported a substantial drop in their bottomlines.

For Central Bank, it was a big drop from Rs 357 crore to Rs 257 crore, while United Bank of India's bottomline slipped from Rs 300 crore to Rs 205 crore.

Most of these banks have also reported drop in operating profit growth. While the overall operating profit of the industry rose by 17.41 per cent, public sector banks continued to be the worst performers. Their operating profit growth was a mere 9.53 per cent against 40 per cent growth in operating profit of private banks and 36 per cent in case of foreign banks.

Even state-owned entities such as Bank of Baroda and Allahabad Bank, which have shown a substantial growth in their net profits from Rs 676 crore to Rs 827 crore and from Rs 542 crore to Rs 706 crore, respectively, have faltered on operating profits.

Allahabad Bank's operating profit dropped from Rs 1,073 crore to Rs 1,024 crore, while that of Bank of Baroda slipped from Rs 2,302 crore to Rs 2,032 crore.

Still these banks could show higher net profit by virtue of lower provisioning. Allahabad Bank had made a provision of Rs 269 crore in FY06 against Rs 476 crore in FY05. Similarly, Bank of Baroda allocated Rs 917 crore for provisioning, down from Rs 1,439 crore in FY05.

Except for a few, most public sector banks have made lower provisioning in 2006. Had they raised their provisioning level, there would have been a further erosion in their net profit growth.

On the asset side, the banking sector, as a whole, saw an increase of 18.66 per cent in 2005-06 with private and foreign banks' assets growing by 31.5 per cent and that of public sector banks rising by 13.81 per cent.

Two state-run banks "� Bank of Baroda and Bank of India "� joined the Rs 1,00,000 crore asset club, taking the tally to six from four in 2004-05. SBI tops the chart with Rs 4,59,883 crore, followed by ICICI Bank at Rs 2,51, 389, Punjab National Bank at Rs 145,267 crore, Canara Bank at Rs 132,822 crore, Bank of Baroda at Rs 113,392 crore and Bank of India with Rs 112,274 crore.

In the private sector, HDFC Bank's assets rose by 43 per cent to Rs73,506 crore and that of UTI Bank by 32 per cent to Rs 49,731 crore.

Among foreign banks, the largest player, Standard Chartered, increased its asset base by 20.50 per cent to Rs 48,182 crore, while both Citibank and HSBC saw over 34 per cent rise in their asset bases to Rs 45,437 crore and Rs 37,473 crore, respectively.

The industry witnessed over 30 per cent growth in credit for the second successive year in 2005-06, with retail credit growing by over 50 per cent. Despite a slower growth of 18.1 per cent in deposits compared with 32.1 per cent rise in advances in 2005-06.

Public sector banks sustained the enhanced credit demand by selling government securities. Among large banks, ICICI Bank posted the highest credit growth "� close to 60 per cent "� followed by Bank of Baroda at 38 per cent, while Indian Overseas, HDFC Bank and Central Bank clocked over 37 per cent growth each.

Deposits continued to be the primary source of funds, accounting for 75.7 per cent of total funds, followed by borrowings (8.5 per cent), other liabilities (8 per cent) and reserves (7.9 per cent).

Seventy-nine banks reported 18.72 per cent increase in interest income, weighed down by public sector banks. The other income of 79 banks rose 9.85 per cent against a decline of 12.25 per cent in 2004-05.

Other income of private banks increased by 51.39 per cent and that of foreign banks by 34.85 per cent. In contrast, the other income of public sector banks fell by 6.39 per cent following a decline in treasury income.