Smaller private banks' profits show bad loans may be declining, but don't cheer just yet

India’s smaller private banks that have announced their earnings have one thing in common.All of them have benefited from a drop in provisions arising out of decline in bad loans and their growth has also been aided mostly from their fee-based businesses.

Kotak Mahindra Bank, posted a 11 per cent surge in its net profit to Rs 698 crore in the three months ended June, from Rs 627 crore in the same quarter last year. It was aided by a sharp drop in provisions to Rs 27 crore from Rs 160 crore in the corresponding quarter last year, while a Rs 49 crore write back in provisions too helped the lender boost its earnings.

Provisions generally refers to the money a bank set aside to cover the losses arising out on bad loans and on the depreciation of its investment portfolio. Under norms, a bank needs to set aside between 20 percent to 100 percent to cover the losses on bad loans, depending upon the quality of asset, which impacts their earnings.

Similarly, a bank invests in treasury instruments such as government bonds. At the time of investment, the bank enters into a contract at a particular price and if the price falls below that level, the bank needs to make provisions for that too.

In the case of Kotak Mahindra, earnings generated from its brokerage arm Kotak Securitiesmore than doubled to Rs 68 crore in the June quarter, which contributed significantly to the profit. Notably, the gross non-performing assets (NPAs) of the bank declined to 1.56 per cent of loans during the quarterfrom 1.58 per cent in the quarter a year ago. Its loan book too has grown at a healthy pace of 13 per cent in the quarter.

Two other smaller private lenders, Federal and South Indian Bank, too have also reported a drop in bad loans and resultant provisions, helping them show better profit numbers. Here too, a drop in provisions has played a key factor in boosting the bottomline. Federal Bank reported a net profit of Rs 220 crore, up from Rs 106 crore in the same quarter a year ago, while South Indian’s net profit rose to Rs 127 crore from Rs 115 crore.

Two days ago, another private lender, DCB Bank, had reported a marginal rise in its net profit at Rs 47 crore from Rs 45 crore. Its gross bad loan ratio slightly inched up to 1.78 per cent from 1.69 percent from a year ago, mainly due to stress in small and medium company accounts.

Despite most of the smaller private banks reporting a drop in bad loans and provision numbers, it might be too early to conclude that the bad loan worries of the sector is over. The numbers of smaller banks do not necessarily indicate the earnings pattern of the industry. For that, we need to wait till the bigger banks come out with their numbers.