GOOD Show But CAN Banks Sustain It?

The earning season is over.

It’s time to take a look at how the banks have fared in a year when Asia’s third-largest economy has shrunk 7.3 per cent. A year when the loan portfolio of the banking system grew just 5.6 per cent, its lowest since 1965 from when such data is available. A year when the Reserve Bank of India (RBI) imposed a moratorium on repayment of loans and allowed banks to restructure loans, and the government guaranteed a Rs3 trillion emergency credit line to the troubled sectors.

The net profit of the listed Indian banks during the financial year 2021 has more than doubled – from Rs41,038 crore to Rs1.03 trillion.

Not all public sector banks (PSBs) are back in the black but their collective net profit for the year is Rs32,346 crore against a Rs9,013 crore loss in the previous year. After consolidation, the number of PSBs has shrunk to 12. (Indian Overseas Bank [IOB] is yet to announce its earnings for the March quarter. In the December quarter, it reported a net profit of Rs213 crore against a net loss of Rs6,075 crore a year ago.) 

For this estimate, I am including yet-to-be-privatised IDBI Bank Ltd in the PSB pack.

The Central Bank and Punjab & Sind Bank continued to be in the red. Of the rest, five that had made losses in the financial year 2020 have made profits in 2021. They are Bank of India, Canara Bank, IDBI Bank, Uco Bank and Union Bank.

As a group, private banks’ net profit has risen from Rs50,053 crore to Rs70,543 crore during this period. (Jammu & Kashmir Bank Ltd is yet to announce its earnings.) All listed private banks have made profits but five of them, including IndusInd Bank Ltd and Bandhan Bank Ltd, have recorded a drop in net profit.

All banks have made operating profit but compared with net profit, the rise in operating profit is less – around 24 per cent, from Rs2.96 trillion to Rs3.66 trillion. The PSBs have shown higher growth in their operating profit than their private sector peers.

When it comes to setting aside money for bad loans, the trend is reversed. Listed private banks’ provision kitty has gone up by a little over 14 per cent, from Rs65,838 crore to Rs75,124 crore, while the PSBs’ provision has actually dropped from Rs1.54 trillon to Rs1.51 trillion. Four private banks and five PSBs have made lesser provisions in 2021 than in 2020. Axis Bank Ltd, Bank of Baroda, Bank of India and IDBI Bank, among others, feature in the list.

Quite a few banks have shrunk their credit portfolio in 2021. Bank of India, IDBI Bank, Punjab National Bank and Union Bank belong to this group. Bandhan Bank has the maximum credit growth (21 per cent), followed by IDFC First Bank Ltd and Catholic Syrian Bank Ltd (around 17.5 per cent each). State Bank of India’s credit growth has been less than 5 per cent, while HDFC Bank Ltd has grown its credit portfolio by 14 per cent and ICICI Bank by 13.7 per cent.

Both Bandhan Bank and IDFC First Bank have grown their deposit portfolio by one-third, RBL Bank by one-fourth, and ICICI Bank and Catholic Syrian Bank by one-fifth. Bank of Baroda and Punjab National Bank, among PSBs, have grown deposit portfolios the least, 2.2 per cent and 3.2 per cent, respectively.

What about bad loans – a key to a bank's health? The gross bad loan -- or non-performing assets (NPA) -- of 28 listed banks has risen around 10.6 per cent, from Rs6.9 trillion to Rs7.6 trillion. The growth in the gross NPA pile for the PSBs is close to 11 per cent compared with a little over 9 per cent for private banks.

After provision, the net NPAs have grown by around 4 per cent, from Rs2.26 crore to Rs2.35 crore. Private banks’ net NPAs have grown 8.4 per cent -- more than double of PSBs’.

Overall, 12 banks have shown a drop in gross NPAs and 13 a drop in net NPAs. State Bank of India, ICICI Bank Ltd, Axis Bank, IDBI Bank, Bank of India are among those that have recorded a decline in both.

Finally, a look at the NPAs as a percentage of the banks’ loan portfolios. Only three private banks have shown a dip in gross NPAs, but among PSBs, 10 have managed to bring it down. For a few, the decline is pretty sharp. For instance, Uco Bank’s gross NPAs are down from 16.77 per cent to 9.59 per cent. For IDBI Bank, they’re down from 27.53 per cent to 22.37 per cent, and Bank of Maharashtra’s, from 12.81 per cent to 7.23 per cent. State Bank of India has managed to pare its gross NPAs from 6.15 per cent to 4.98 per cent.

Those that have shown an increase in gross NPAs include Bandhan Bank (from 1.48 per cent to 6.81 per cent), IDFC First Bank (2.6 per cent to 4.15 per cent) and Indian Bank (6.87 per cent to 9.85 per cent). At least six banks continue to have gross NPAs in double digits.

Post provision, 10 private banks have shown higher net NPAs; the loner in the PSB pack is Indian Bank. Bandhan Bank’s net NPAs have grown from 0.58 per cent to 3.51 per cent; for Dhanlaxmi Bank, the rise is from 1.55 per cent to 4.76 per cent.

Two banks that have halved their net NPAs are IDBI Bank (from 4.19 per cent to 1.97 per cent) and Punjab & Sind Bank (8.03 per cent to 4.04 per cent).

Among all listed banks, only two have more than 5 per cent net NPAs – Punjab National Bank and Central Bank of India.

(IOB’s gross NPAs in December 2020 stood at 12.19 per cent against 17.12 per cent a year ago and net NPAs dropped to 3.13 per cent from 5.81 per cent during that period.)

On the evening of March 24, 2020, India announced a nationwide lockdown to restrain the spread of the Covid-19 pandemic. Considering what followed, none could have anticipated the show put up by the banking sector in 2021. Is it sustainable?

The RBI’s last Financial Stability Report (FSR) in January had estimated banks’ gross NPAs to rise to 13.5 per cent by September 2021, from 7.5 per cent in September 2020, under the baseline scenario. In a severe stress scenario, these can rise to 14.8 per cent. Till March, the banks could hold on but not all of them will be in a position to stomach the impact of the second wave of the pandemic.

The next FSR is due later this month. Let’s wait and see how the RBI is reading the scene.

This article first appeared in Business Standard

The writer, a consulting editor with Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd

His latest book: Pandemonium: The Great Indian Banking Story

https://www.amazon.in/dp/819464335X/

To read his previous columns, please log on to www.bankerstrust.in

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