A sombre performance by private banks

The sharp rise in slippages has weighed on earnings

Healthy loan growth, notable reduction in the stressed assets pool, but a sharp rise in slippages owing to the RBI’s revised framework for stressed assets, just about sum up the March quarter results for leading private sector banks.

At an aggregate level, a modest growth of 11 per cent in core net interest income (despite healthy growth in loans) and more than doubling of provisions, have led to a 30 per cent y-o-y fall in net profit in the March quarter for private sector banks.

The sombre performance is mostly attributable to two large banks — ICICI Bank and Axis Bank — together constituting over 70 per cent of the total NPAs of all private banks.

The banks’ relatively higher exposure to stressed sectors and the RBI’s diktat on stressed assets have weighed on their earnings.

Accelerated NPA recognition

What hung as a Damocles sword over banks in the March quarter was the RBI’s circular issued in February on the revised framework for resolving stressed accounts, which was expected to result in a steep rise in slippages and provisioning. Essentially, the RBI has done away with all the old restructuring schemes.

There has been a significant one-time impact of the RBI’s diktat on ICICI Bank and Axis Bank in the March quarter.

Axis Bank reported ₹16,536 crore of slippages in the latest March quarter. Restructured accounts under SDR, S4A, 5:25 etc, have fallen to about ₹2,000 crore from nearly ₹7,000 crore in the December quarter.

ICICI Bank reported slippages of ₹15,737 crore in the March quarter, of which about ₹9,900 crore has been on account of the RBI’s new framework for stressed assets.

The sharp rise in slippages has resulted in an increase in provisioning, impacting earnings for these banks.

While net profit for ICICI Bank fell by 49 per cent y-o-y in the March quarter, Axis Bank’s earnings slipped into the red, reporting a loss of ₹2,189 crore for the quarter.

YES Bank, predominantly a corporate lender though, has seen minimal impact of the RBI’s February circular.

The bank has seen no slippage during the March quarter from restructured book and no impact on the outstanding restructured book (0.16 per cent of gross advances) as of March 2018.

But just like Axis Bank, YES Bank has been under pressure owing to the sharp bad loan divergence pertaining to FY-17 reported by the bank a few quarters back. But given that some of the accounts have already been repaid in full — classified as NPAs, sold to ARC or upgraded as standard — the actual impact of the divergence has been much lower in the latest March quarter.

Nonetheless, given that banks have been reporting divergences over the last two consecutive fiscals (FY-16 and FY-17),asset quality will need monitoring in the ensuing quarters as well.

HDFC Bank, in comparison to its peers, has managed to maintain a steady asset quality. While in absolute terms, gross non-performing assets have increased by 46 per cent y-o-y in the March quarter, given a healthy growth in loans, GNPA as a per cent of loans is still a manageable 1.3 per cent (though management sees some challenges in the agri book).

Healthy loan growth

Given that the overall loan growth within the banking system stood at around 10 per cent y-o-y as of March 2018, the credit offtake for private sector banks has been healthy.

HDFC Bank reported 18.7 per cent y-o-y growth in loans, led by retail growth of 27.4 per cent. Axis Bank reported a 18 per cent growth in loans in the March quarter, led by retail that grew by 23 per cent.

ICICI Bank’s domestic loans grew by 15 per cent, again driven by a robust growth of 21 per cent in retail loans.

YES Bank posted a robust 54 per cent y-o-y growth in loans, both corporate and retail business, driving growth.

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