As the fresh slippages remain high during FY20 also, Icra expects the credit loss provisioning for PSBs to remain high at 2.4% of their advances, even though it will be lower than 4.3% during FY19.
Public sector banks (PSB) are likely to have weak return on assets (RoA) for the financial year 2019-20, with most of their operating profits getting consumed by the credit provisions, Icra ratings forecasted in a report on Wednesday.
With incremental stress emerging from real estate, auto, medium and small enterprises, NBFC and possibly the retail sectors amid the slowing economic growth trends and subsequent impact on economic activity and income levels, gross slippages are estimated to remain elevated at 3.2-3.6% of standard advances during FY20, compared to 3.9% during FY19.
As the fresh slippages remain high during FY20 also, Icra expects the credit loss provisioning for PSBs to remain high at 2.4% of their advances, even though it will be lower than 4.3% during FY19. For PVBs, the credit provisions are likely to remain stable at 1.9% of the advances during FY20.
As a result, overall profitability is expected to be poor and return on equity (RoE) of less than 1%. Private sector banks (PVB) too will face another challenging year due to high credit cost during FY20 and a muted RoE at 9-10%, notwithstanding a 15-30% year-on-year (y-o-y) growth in their net profits during the fiscal, the report said.
Though PSBs on an aggregate basis returned to profit for the first time in the Q1FY20, after 10 consecutive quarters of losses from Q3FY17. This was a result of reduction in their net non-performing assets (NPA) levels by March 2019 upon the sizeable provisioning done in FY19. On the other hand, strong net interest income (NII) growth and decline in credit provisions drove strong 30% y-o-y growth in profit after taxes for PVBs during Q1FY20.
Anil Gupta, sector head – financial sector ratings, Icra, said, “With core operating profits expected to be similar to the credit provisions for PSBs during FY20, the RoA for PSBs is expected to remain weak. On the other hand, with relatively better core operating profits, the credit provisioning can be easily be absorbed by PVBs, thereby translating in satisfactory ROA of 0.9-1.1% during FY20.”