Increased provisioning towards loan-loss and pension liability weighed down the profitability of a clutch of public sector banks including State Bank of India, Punjab National Bank and Union Bank of India in the third quarter ended December 31, 2010.
These banks account for about 40-50 per cent of public sector banks' market share.
PSBs stepped up provisioning for a host of reasons, ranging from meeting the regulatory stipulation on loan loss provisioning (an expense that is set aside as an allowance for bad loans); provisioning for some restructured accounts slipping into the non-performing category, or for loans given to farmers who availed themselves of the agriculture debt waiver and relief scheme, turning bad; and provisioning for pension liability.
The need to catch up with the statutory 70 per cent provision coverage ratio (PCR) in the case of State Bank of India led to its loan loss provisioning (LLP) more-than trebling in the reporting Q3 to Rs 1,632 crore (Rs 515 crore). The provisioning clipped the pace of net profit growth of the country biggest lender, rising 14 per cent to Rs 2,828 crore (Rs 2,479 crore).
But for the LLP stipulation, the SBI Chairman, Mr O.P. Bhatt, said the bank's net profit would have seen a 32 per cent growth to Rs 3,280 crore. The bank's PCR improved to 64 per cent, compared with 56 per cent in the third quarter of 2010-11. The RBI has allowed it time until September 2011 to meet the PCR requirement.
Overall, SBI made provisions of Rs 2,051 crore during the quarter, including mark-to-market provision on investments of Rs 209 crore. Total restructured loans of the bank stood at Rs 32,750 crore. Of this, assets worth Rs 4,422 crore have slipped as NPAs.
In the case of PNB too, the profitability growth of 7.8 per cent to Rs 1,090 crore (Rs 1,011 crore) was subdued as provisioning for NPAs jumped 69 per cent to Rs 555 crore (Rs 328 crore). Further, the country's second largest PSB made a provision of Rs 235 crore towards pension liability during the quarter.
“There's no concentration of NPAs in any sector. But there have been some temporary aberrations in some accounts. We are quite hopeful of turning around a better performance on the upgradation front in the current quarter,” Mr K.R. Kamath, Chairman and Managing Director, said at the time of announcing the results.
Similarly, Union Bank of India saw a deceleration in profitability in the reporting quarter due to a sharp jump in provisions towards bad loans. The bank's net profit edged up 8 per cent to Rs 580 crore (Rs 534 crore).
Provisions for NPAs in the reporting quarter rose by Rs 361 crore (Rs 43 crore). NPAs were from the agri sector (due to the relief schemes), restructured accounts (some of which turned into NPAs) and some corporates related to the export sectors.
“Going forward, the pace of slippage will decline. We expect recovery and upgradation in NPAs to boost our profitability in FY 2011-12. Provisioning in the third quarter is higher because it is better to make provisions when profits are good,” said Mr M.V. Nair, Chairman and Managing Director, Union Bank of India.
PSBs may have to further step up provisioning towards NPAs and pension liability in the coming few quarters.
It may be pertinent to note here that the RBI, in its latest financial stability report, said that asset quality continued to pose some concerns as the growth in NPAs outstripped growth in advances leading to a deterioration of gross NPA ratios.
Doubtful and loss assets, according to the report, comprised over 50 per cent of the stock of NPAs indicating the preponderance of sticky advances.