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The improvement in public sector banks’ (PSBs) profitability in the short term appears limited, given their limited ability to increase lending rates, tighter monetary policy and asset quality pressures, according to a report released by ICRA.
Also, higher levels of inflation and the impending wage revision are likely to add pressure to the profitability.
Considering the current business slowdown, the stretched working capital cycles of corporates and the slow pace of economic recovery, ICRA is of the view that the Gross NPA percentage of the PSBs would be at 4.8-5 per cent as on March 31, 2014. As for the Gross NPA percentage for the banking system as a whole, this, in ICRA’s view, could rise further to 4.2-4.4 per cent as on March 31, 2014 from 4.1 per cent as on December 31, 2013, given that the NPAs of the PSBs have a larger bearing on the banking system NPAs. The PSBs’ high levels of Net NPAs (around 2.8 per cent) and fresh slippages (over 3%) are also likely to keep their core profitability under pressure, said the report by ICRA, an associate of, global agency Moody’s.
Basel III Capital
Under the Basel III guidelines, banks have to achieve Common Equity Tier I of 6.13 per cent and overall Tier I of 7.63 per cent by March 31, 2015. The Government will infuse ` 11,000 crore equity capital in FY15.
The report said, “Although the PSBs would not need significant common equity capital in FY15, in case they are unable to mobilise additional Tier I capital during that fiscal, their equity requirement could go up to ` 20,000 - ` 45,000 crore…Thus, abatement of concerns over asset quality and equity dilution would be critical for PSBs to be able to mobilise equity from external investors. While capital appears to be a big challenge for the PSBs, private banks are expected to be comfortable on capital, given their higher level of current capitalisation and better earnings and asset quality profile.”
On the whole, because of lower NIMs, lower non-interest income, higher credit provisions and depreciation on fixed income investments, the PSB’s PAT for FY2014 are likely to be 30-40 per cent lower than the FY2013 levels, according to ICRA.
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