Asset quality concerns ease at banks as fight against NPAs bears fruit

Written by Shayan Ghosh | Mumbai | Updated: May 28 2014, 17:26pm hrs
A glance at the March 2014 quarter results of banks indicates an improvement in asset quality with several lenders reporting a sequential drop in gross non-performing assets. State Bank of India, for instance, saw a 9.1% sequential fall in gross NPAs to R61,605 crore in Q4FY14.

As we mentioned earlier, we have set up special committees to look after accounts that are showing stress but are not necessarily NPAs, and these (committees) have worked well, said SBI chairman and managing director Arundhati Bhattacharya.

At the end of fiscal 2014, gross NPAs of the 40 listed banks stood at R2,50,715 crore, down 0.5% from the December quarter.

We have already seen some improvement in new slippages among our PSU coverage (with the exception of PNB), down to 4.5% in 4QFY14 from a peak of 9.2% in Q4FY12. We expect new stressed loan formation to fall consistently over the next few years to 2% in FY18, similar to the bottom of 2% in FY08, said global investment bank Goldman Sachs in a report.

The report added that while the drop would likely be more pronounced for PSU banks, it should be modest for private banks, given the low base and some natural delinquency in the usual course of business.

Gross NPAs of another public sector bank, Bank of Baroda, at the end of the March quarter fell 0.41% to R11,875.9 crore. The banks chairman & managing director SS Mundra said: Even though our NPAs have increased on a year-on-year basis, this is the slowest addition to incremental NPAs in the industry. So, we believe slippages and NPAs are beginning to improve with the expected improvement in the economy.

While asset quality may be improving, business is still dull. Given that the pipeline of projects is virtually empty, lenders have seen few opportunities to grow their project finance portfolios. On the advances front, private sector banks have seen better growth than public counterparts; while private banks saw a credit growth of 17.94%, public sector banks witnessed a 14.71% credit growth. We expect a growth of 18-20% on the loan book front. In project financing, we are not really experiencing any uptick in loans, said Bank of India chairman & managing director VR Iyer.

Starved for quality assets, a host of banks have been resorting to rate cuts in a bid to attract top-quality corporate customers, the outcome of which has been reflected in the corporate credit growth seen in the March quarter.

In an earlier story, FE had reported that Bank of Baroda and SBI were looking to reduce interest rates to corporates by 25-50 bps and 50-75 bps, respectively. SBI, Indias largest lender, saw its loan to corporates grow 24% to R4,71,103 crore in Q4. In case of Bank of India, the corporate credit book grew 31% to R2,64,260 crore in Q4.

Oriental Bank of Commerce chairman & managing director SL Bansal had said: Banks dont want to let go of good accounts like Tata, Hindalco and Reliance. OBCs corporate loan book essentially loans to large companies grew 9.6% in the year to March 2014. The bank's corporate loan book growth stood at 7% in the December quarter. However, concerns about credit costs prevailed, as pointed out by a recent report by Kotak Institutional Securities, which said it assumes credit cost of banks is going to increase over the next two years. Accordingly, it said that SBIs loan-loss provision which stood at 1.2% in 2014, is expected to reach 1.5% in 2015.

In terms of deposits, public sector banks have paced ahead of private banks with a 15.8% growth, compared to a 14.6% year-on-year growth seen by private banks.

However, private sector banks have shown better profits than their public sector counterparts, fuelled by higher non-interest income.

According to data on 40 banks, public sector banks have seen an 8.5% fall in net profit owing to a fall in net profits of large banks like SBI, Union Bank, Bank of India and Punjab National Bank. On the contrary, ICICI Bank, HDFC Bank and Axis Bank reported healthy profit figures. HDFC Bank's net profit was up 11% and ICICI Bank reported a 15% rise in net profit. Gross NPAs were flat q-o-q and provision coverage remained robust at 73%.

HDFC Banks asset quality has largely held up through the slowdown except for some pain on its CV book, JPMorgan said in a report on HDFC Bank. Operationally, aggregate net interest income of 40 banks grew 12.75% over March last year, with private banks performing better and showing a growth of 15.23%. Total income growth was at 11.74% as public banks registered a growth of 10.46% from last year, compared to 8.52% in the December quarter.