Optimists betting on the bottoming out of the NPA cycle have been silenced. The country’s largest lender, SBI, reported steep slippages in the latest December quarter, just when the bank’s asset quality pressure appeared to have eased considerably in the previous quarter.

For SBI ,whose bad loans have gotten bigger since last April after merging its five associate banks, the worries seem far from over. The bank appears to be stuck with slippages of around ₹25,000 crore for some time now. Slippages for the merged entity for the June 2017 quarter stood at ₹26,249 crore, higher than the around ₹25,000 crore in the March 2017 quarter.

After a sharp fall to ₹9,026 crore in the September quarter, slippages have climbed back to ₹25,836 crore in the December quarter. This time, it is the RBI’s annual risk-based supervision exercise that has led to the spike in slippages. SBI has reported bad loan divergence to the tune of ₹23,239 crore pertaining to FY17.

An 83 per cent jump in bad-loan provisioning and weak loan growth have led to SBI reporting a loss of ₹2,416 crore in the December quarter, significant for a bank its size.

The provisioning story

For most public sector banks, after additions to bad loans peaked in the March to September 2016 quarters (after the RBI’s asset quality review exercise), growth in bad loans have moderated in the last two to three quarters. For SBI though, the merger with its associate banks continued to weigh on its asset quality.

There is another reason for its elevated provisioning. Ageing of bad loans (a large book at that) has led to incrementally higher provisions, which is likely to continue, with the bank’s gross non-performing assets at a high 10.3 per cent of loans.

For the other big players such as Punjab National Bank and Bank of Baroda, where slippages have moderated or contained, provisioning has remained high for the very same reason.



PNB, for instance, reported a fall in GNPAs — from 13.7 per cent in the December 2016 quarter to 12.1 per cent of loans in the latest December quarter. But bad-loan provisioning remained at about ₹2,900 crore; in fact, it has been steadily increasing in the past two quarters.

For BOB too, that declared its results on Friday, provisioning for bad loans has nearly doubled in the December quarter. Just as SBI, the bank, after reporting sharp fall in slippages in the September quarter, saw slippages almost double in the September quarter.

Given the large bad loan book for these lenders and the fact that accretion to bad loans remain lumpy and erratic, earnings could remain under pressure in the coming quarters.

Mixed core performance

While asset quality woes continue to plague all the three, there has been notable difference in the core performance of these banks.

Bank of Baroda’s has been relatively better than its peers in the latest December quarter. SBI’s net interest income grew by a muted 5.2 per cent year-on-year on the back of a tepid 2 per cent growth in advances; large, mid corporate and SME loans declined by 4.2 per cent.

PNB’s net interest income grew by 6.9 per cent in the December quarter on the back of healthy 20 per cent growth in domestic advances, thanks to pick-up in large corporate loans.

For Bank of Baroda, a jump of 40 per cent in its net interest income in the December quarter is a key positive. This has been backed by a 16 per cent growth in loans and improvement in margins.

While after a long period of consolidation, pick-up in loan growth is a positive for the bank, the sustainability of this trend will be critical for a consistent improvement in core operating profit. As such, the increase in provisions has eaten into the bank’s operating profit, with the bank reporting a 55 per cent fall in profit in the December quarter.

Hence, while credit growth is recovering and the banks seem well capitalised now after the Centre’s capital infusion, a sustainable recovery in earnings will remain elusive until the NPA cycle truly bottoms out.

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