Despite 60% rise in GNPAs, seven private banks’ combined Q1 net increases 15.3%

By: | Published: July 27, 2016 6:14 AM

Despite more than 60% Y-o-Y rise in gross non-performing assets (GNPAs), the combined net profit of seven private sector banks for the June quarter has risen 15.3% (Y-o-Y) to Rs 6,507.2 crore, a detailed FE analysis has revealed. Sequentially, however, their combined net profit witnessed a 7% decline.

Despite more than 60% Y-o-Y rise in gross non-performing assets (GNPAs), the combined net profit of seven private sector banks for the June quarter has risen 15.3% (Y-o-Y) to Rs 6,507.2 crore, a detailed FE analysis has revealed. Sequentially, however, their combined net profit witnessed a 7% decline.

While the primary driver of the rise in the net profit was a 19.2% (Y-o-Y) increase in net interest income, the difference between interest earned and interest expended, a 46.2% (y-o-y) rise in provisions necessitated by the jump in GNPAs acted as a headwind.

Not surprisingly, the country’s most valuable lender, HDFC Bank, accounted for over 60% of this rise, with its standalone net profit growing by more than 20% (Y-o-Y) to Rs 3,238.9 crore.

What seems to have really impressed the Street, however, is these banks’ growth in advances and stability in net interest margins (NIMs). Despite loan growth by the banking system as a whole failing to record even 10.5% for a single fortnight during the last quarter, the combined loan book of these seven bank’s grew 22.3% (Y-o-Y).

Similarly, even in a falling interest rate environment, the median NIM of these seven banks was down just three basis points sequentially to 3.94%, with only Axis Bank and Federal Bank reporting lower NIMs compared with the March quarter.

“Going into results, our focus was on HDFC Bank’s ability to sustain loan growth and margins and while loan growth was slightly lower than expected, NII growth was in line due to better margins. Further, a 23% (y-o-y) loan growth is still well above the system and clearly HDFC Bank is gaining disproportionate market share from the rest of the system which is experiencing weakness,” analysts at HSBC Global Research observed.

According to them, the reason behind HDFC Bank’s NIM expanding by 10 bps during the quarter was higher contribution of retail loans. Typically, loans to individuals are more expensive than corporate loans. While several private sector banks don’t disclose their yields on loans for each quarter, the ones that do have reported an expansion.

IndusInd Bank, for instance, has reported an yield on advances of 12.07% in Q1FY17, which is three basis points more than the March quarter. In case of South Indian Bank, the increase was 33 bps to 10.89%. Other than higher yields, what has helped the NIMs of these private sector banks is a 20.3% (y-o-y) jump in current account and savings account deposits.

A sharp rise in bad loans in some of these banks, however, has concerned the Street. GNPAs at Axis Bank, for instance, more than doubled y-o-y, necessitating an 88.7% (y-o-y) increase in provisions, pushing its bottom line lower by 21.4% (y-o-y) to Rs 1,555.5 crore.

While the top management of the bank said the rise in bad loans during the quarter was in line with its expectation, with a majority of it coming from the ‘watch list’ the bank had created from within its corporate loan portfolio, analysts are not entirely convinced. Analysts at HSBC Global Research fear that the portion of slippage from the bank’s ‘watch list’ accounts could be higher than 60% guided by its management.

Analysts at Motilal Oswal, however, are not perturbed, and believe the deterioration in the asset quality

remains well within the full-year guidance. “Management has already communicated that 60% of the watch list is likely to turn into NPAs over two years with slippages likely to be front loaded,” they said.

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