Sector View . After a turbulent year, is the worst over for banks?

At first glance, aggregate earnings of banks in the latest June quarter that ended in the black — from a loss posted in the same quarter last year, a double-digit loan growth, a fall in provisions and bad loans — usher in a sense of optimism that the worst may be over for the beaten-down sector.

But it is only when you dig deeper into individual bank results that a worrying trend of rise in slippages and stressed book, weak core performance, and low NPA recoveries emerges.

Low base

In the March 2018 quarter, after the RBI’s earlier circular on resolution of stressed accounts, banks had reported steep rise in slippages (over ₹1-lakh crore in that quarter alone) and provisioning.

The large pile up of bad loans continued to weigh on banks’ earnings in the following quarters through FY19.

Hence, against a sombre performance last year, the numbers reported by banks in the latest June quarter look optically good. For instance, PSBs had reported a loss of over ₹12,000 crore last June quarter, as against a profit of over ₹4,000 crore in the June quarter this year.

In the private bank space too, a low-profit base has made this year’s June quarter earnings appear healthy.

ICICI Bank had reported a loss of ₹120 crore in the June quarter last year; it delivered a profit of ₹1,908 crore in the June quarter this year.

But asset quality and core performance of some leading PSBs and private sector banks suggest that earnings could be under pressure in the upcoming quarters.

While the headline bad loan numbers have declined by about 5 per cent Y-o-Y, they have inched up sequentially, compared with the March quarter.

Rise in slippages

Banks’ exposure to certain stressed companies in the NBFC space and Reliance ADAG Group has resulted in slippages and increase in stressed book. For YES Bank, a significant rise in slippages and a rise in stressed accounts remain a concern. The slippages went up to ₹6,232 crore in the June quarter from ₹3,481 crore in the March quarter. YES Bank had identified ₹10,000 crore of stressed accounts in real estate, media and entertainment and infrastructure sectors in the March quarter; this went up to ₹29,470 crore in the June quarter.

For ICICI Bank, while overall slippages fell notably in the June quarter to ₹2,779 crore from ₹3,547 crore in the March quarter, there were additions to retail bad loans (₹1,511 crore of slippages), which included ₹452-crore slippages from the Kisan Credit Card portfolio. Also, the stressed book — BB and below-rated — remains significant at ₹15,355 crore. For Axis Bank, gross slippages went up to ₹4,798 crore; it was the substantial write-offs of ₹3,005 crore (rather than recovery) that led to the marginal decline in bad loans.

HDFC Bank has continued to keep asset-quality pressure at bay. While the bank’s GNPAs, in absolute terms, has been growing at 30-40 per cent annually over the past two years, strong growth in loans has kept the delinquency ratio (1.4 per cent of loans) under check. But the bank has been facing stress in its agri portfolio.

The trend in PSBs has not been comforting. The first quarterly results of Bank of Baroda, after its merger with Vijaya and Dena Bank, had signs of stress on profitability and asset quality. While bad loans came down marginally in absolute terms, slippages and write-offs remained elevated.

As of June, the watchlist of the merged entity is a huge ₹16,500 crore — slippages from this can lead to higher provisioning in the coming quarters. For PNB , a still large loan book and deferment of provisions with respect to certain frauds can add pressure on earnings. SBI, the country’s largest bank, saw slippages of ₹16,212 crore (from ₹7,505 crore in the March quarter). This is hardly comforting for a bank already sitting on a bad loan book of over ₹1.6-lakh crore.

A substantial pool of stressed assets remains a concern, and quick resolution of large accounts under the Insolvency and Bankruptcy Code (IBC) will be critical.

Core performance

On the core performance front, private banks grew their loan book at a faster clip compared to PSBs. ICICI Bank reported a growth of 18 per cent in domestic loans, led by 22 per cent in retail. Its net interest income grew by a strong 27 per cent Y-o-Y in the June quarter. HDFC Bank delivered growth of 17 per cent in loans and 23 per cent in NII. Axis Bank’s domestic loan growth was a healthy 19 per cent.

For State-owned bank PNB, a notable 12 per cent fall in NII and a weak capital ratio are a concern. SBI’s domestic loan growth stood at 12 per cent in the June quarter, lagging behind leading private sector banks.

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