Stress continues: Bad loans haunt state-run banks' earnings in April-June

A surge in the bad loan levels and resultant provisions dented the earnings of most state-run banks that reported earnings on Friday, even as fall in provisions and core income aided growth in their bottom-line.

For Punjab National Bank (PNB), the second largest state-run bank in terms of assets, an increase in bad loans limited the growth in its net profit to a modest 10 percent at Rs 1,405 crore in April-June quarter. The rise in profit was largely due to a sharp 13 percent fall in the provision figures to Rs 927.61 crore from Rs 1,066.48 crore in the year-ago quarter.

Besides the fall in provisions, a 12 percent jump in the net interest income, or the core income of the bank, too helped the profit. But the gross non-performing (NPA) assets of the lender rose to 5.48 percent of total loans - the highest in at least five years - compared with 4.84 percent in the year-ago quarter and 5.25 percent in the March quarter.

The chunk of bad loans on PNB’s books, in absolute terms, grew to Rs 19,603 crore during the quarter from Rs 15,091 crore in the corresponding quarter last year. At 5.48 percent, the gross NPA figure of PNB is the highest among the large banks.

Saday Sinha, banking Analyst at Kotak Securities said asset quality remains a concern for PNB.
“PNB’s stressed book consists of about 13% of loan book, higher than the industry mean, which makes us slightly cautious on the stock,” Sinha said.

Shares of PNB fell 2.25% intra day and partly recovered to close at Rs 924, down 0.51 percent. The benchmark Sensex, meanwhile, closed down 0.7 percent, off the 1 percent it had hit earlier in the day. The BSE Bankex ended the day down 1.4 percent after falling 1.6 percent during the intra-day.

State-run banks are more prone to bad loans since traditionally they lend to high-risk lending and often are subjected to directed lending by the government, the majority shareholder, to roll out politically inspired populist policies .

Of the Rs 2.5 lakh crore gross NPAs of 40 listed banks as of end-March, over 90 percent was contributed by state-run banks.

High provisions hit Allahabad Bank, Indian Bank

Kokata-based Allahabad Bank posted a significant fall in net profit after its provisions nearly doubled to Rs 852 crore pulling down its Q1 net profit by 73 percent on year to Rs 113 crore. Reacting to the dismal earnings, shares of the bank fell 4 percent intra day. The stock, however, wiped out all the losses and closed up 1.5 percent at Rs 119.05.

Indian Bank, which reported earnings on Friday, too showed stickiness in the asset quality. The bank’s gross NPA rose to 4.01 percent from 3.41 percent a year ago and 3.67 percent in the March quarter. Its net profit fell to Rs 207.16 crore in the June quarter, down 35 percent, from the year-ago quarter. Shares of the bank closed up 0.65 percent at Rs 162, after falling 8.6 percent earlier in the day.

Kolkata-based Uco Bank posted a marginal 2 percent jump in net profit to Rs 521.40 crore from Rs 511.11 crore in the corresponding period last year. GNPA levels, however, have shown an improvement in the bad loan. Its gross NPAs stood at 4.31 percent, more or less at the same level in the March quarter, and down from 5.58 percent a year ago. Shares of Uco Bank closed down 6.53 percent at Rs 100.90 on the BSE, after hitting a low of Rs 100.35 intra day.

Rise in bad loans impact the profitability of banks as they need to set aside more money to cover such loans. Under norms, banks need to set aside anywhere between 20 percent to 100 percent of the loan amount to cover bad loans, depending on the nature of the asset, as compared with 0.4 percent for a standard loan.

Analysts caution

According to analysts, the bad loan addition on the books of state-run banks will continue in the next few quarters before showing signs of a decline. But for private sector banks, at least, the worst seems to be behind with most of them reporting only a marginal rise in the bad loan numbers.

Last week, Axis Bank posted a marginal jump in the bad loan numbers to 1.34 percent from 1.1 percent in the year-ago quarter, while HDFC Bank’s GNPAs remained almost at the same level of 1%.

But any revival in the current situation will hugely depend on how the restructured loans in the banking system perform. In the absence of a strong economic revival, analysts estimate 20-25% of the restructured loan pile to turn bad. As of end-March, about Rs 6 lakh crore worth loans are estimated to have been restructured by banks both through the corporate debt restructuring channel and by way of bilateral restructurings.

Any recovery hugely depends on how soon the Modi government can convert its promises - fast-tracking clearances for stuck projects and getting foreign investments into infrastructure projects - to reality.

(With inputs from Kishor Kadam)