If one were to go by numbers alone, the doubling of banks’ net profit in FY17 appears heartening. But, as they say, the devil lies in the detail. The reason for banks’ stellar performance in FY17 is due to the tumultuous performance in FY16 when, thanks to the RBI’s asset quality review, most banks incurred huge losses. In FY16, banks’ net profit had plunged 70 per cent over the previous fiscal and, over this low base, the sharp jump in FY17 is nothing more than an optical treat. In fact, in the latest June quarter, profits have grown by a meagre 8 per cent Y-o-Y.

After the RBI’s asset quality review in December 2015, banks’ gross non-performing assets had doubled, with GNPA, as a per cent of loans, shooting up from 4-odd per cent in FY15 to 7.8 per cent in FY16. While the pace of incremental addition to GNPAs slowed in FY17, bad loans still grew by a worrisome 24 per cent to a little over 9 per cent of loans. This, despite the massive clean-up that happened in the previous fiscal. With advances growth within the sector falling to 4 per cent levels in FY17, weak core performance has only added to banks’ woes. Core net interest income grew by just 6 per cent. In the latest June quarter, credit growth continues to languish at 4 per cent levels, while GNPA has grown 34 per cent.

Winners and losers As has been the case historically, private banks have managed to outperform their public sector counterparts, at least on the core performance front. In FY17, net interest income of private banks still grew by a decent 14 per cent and credit by about 12 per cent (versus 2-odd per cent growth in both for PSU banks). In the June quarter, performance has slightly inched up, with net interest income growing by 15 per cent and advances by 15 per cent. Kotak Mahindra Bank, HDFC Bank, IndusInd Bank, Federal Bank, YES Bank, which have delivered a robust growth of 20 per cent and above in both credit and earnings, have been clear winners.

However, ICICI Bank and Axis Bank have continued to see deterioration in asset quality owing to their relatively higher exposure to stressed sectors.

For PSBs, the story on asset quality and core performance has not changed much. While earnings have crawled back to the black, they still remain weak. Even leading banks such as PNB, BOB and SBI remain laggards. For SBI, after the merger with its five associate banks, the stock pile of bad loans is now a tenth of its loans. The bank’s net interest income declined by 3.5 per cent Y-o-Y in the June quarter and loan growth (domestic) was a modest 1 per cent. PNB’s GNPAs are still a steep 13.6 per cent of loans.

What lies ahead Nothing in the performance of banks — 6-7 quarters after the RBI’s asset quality review — suggests that the NPA problem is bottoming out. Even as the pace of quarterly slippages has moderated, provisioning requirement is unlikely to fall substantially in the coming quarters. Ageing of non-performing assets, which are currently over ₹8 lakh crore, could lead to significantly higher incremental provisioning this fiscal. Credit growth too is unlikely to revive in a hurry. Given this backdrop, it is best to avoid value traps in PSBs. In the private bank space too, investors would be better off with a few private bank stocks such as HDFC Bank, IndusInd, YES Bank, and Federal Bank, which have good earnings visibility, though lofty valuations.

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