Tough quarter on asset quality shows PSB turnaround may have to wait

By: | Published: February 7, 2015 12:01 AM

While net interest income of public sector banks registered a growth in the third quarter of FY15...

While net interest income of public sector banks registered a growth in the third quarter of FY15, asset quality deteriorated significantly, with bankers hinting that a turnaround is still a few quarters away.

Gross NPA margins rose by almost 20 bps across the sector as a soaring secondary market did not translate into actual demand in the economy. Slippages jumped during the quarter ended December 31. While Bank of Baroda reported a 73% rise in fresh slippage sequentially, Canara Bank was hit with an increase of nearly 40%.

“The banks are a proxy for the economy as a whole. If the economy as a whole is not doing well, banks will also not do well,” Ranjan Dhawan, executive director of Bank of Baroda, said during the quarterly earnings press conference.

“Normally, our NPAs for the quarter are at an average of R2,000 crore. This time, the NPA is nearly at R3,100 crore, which has resulted in an excess provision. This has impacted our net interest margins (NIMs), our return on assets,” he added.

JPMorgan analysts said the NPA spike and a weak revenue outlook were worrying.

“The stress appears to be granular with SME and agriculture continuing to contribute, which is the worrying part, in our view. The long-term macro tailwinds are positive, but the current stress could continue for two to three quarters,” the JPMorgan report dated February 1, said.

Analysts are also pessimistic of a faster recovery. Punjab National Bank saw a 19% increase in net NPAs, while restructured loans declined 70 bps sequentially.

“Outlook has weakened for Punjab National Bank as asset quality stress is taking much longer to peak than earlier expected. We now expect FY16 also to remain weak with FY17 likely to witness gradual recovery,” HSBC Global Research analysts noted.

“The economic recovery is delayed. However, if the economy picks up and industrial output increases, naturally there will be demand for credit,” said Arun Tiwari, chairman & managing director, Union Bank, adding that they expect credit growth to be around 10-11% and deposit growth of 9-10% in FY15.


The bank’s net interest margin (NIM) fell almost 253 bps q-o-q. Reliance on corporate loans continues to reduce with Bank of Baroda’s corporate loans down 27% y-o-y with JPMorgan analysts terming it “a capital-efficient way of expanding the revenue base”. Retail credit rose 14% y-o-y. Canara Bank’s retail advances also increased 22.3% y-o-y, but that was offset by 23.57% growth in agriculture lending and 19.49% rise in medium, small and micro enterprises.

“We continue to remain concerned about still high growth in SME segment as it is also one of the chief contributors to asset quality stress for the bank. Infra sector exposure also remained high at 21% (with) 15% to power sector,” HSBC Global Research analysts wrote.

Central Bank of India stood apart from its peers as its third-quarter profit more than doubled to R138 crore, compared with the same period in the last fiscal, helped by a surge in non-interest income. However, its asset quality also deteriorated during the quarter with gross non-performing assets rising 3% q-o-q.

Bankers and analysts are now hedging on forward movement in reforms, especially in infrastructure and power, to be significant drivers to improve banking sector results.

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