1 4 Jun 23 - Jul 06, 2014 CAPITAL MARKET

IndiaSectorIndiaSector

Improved asset quality and better core per-

formance helped the banking sector post

better financial results for the quarter ended

March 2014 (Q4), Earning of public sector

banks (PSBs) was supported by improve-

ment in the core performance. Private sec-

tor banks (PVBs) posted healthy credit

growth and earning was supported by strin-

gent cost-control initiatives. Also, PSBs

cleaned up their non-performing asset (NPA)

loan book with large sales of bad loans to

asset reconstruction companies (ARCs).

The aggregate net profit of 42 scheduled

commercial banks posted a flat growth after

recording a decline in the two previous quar-

ters of the financial year ending March 2014

(FY14). Net profit of 26 PSBs declined for

the sixth straight quarter year on year. How-

ever, the pace of fall, at 8.5%, was consider-

ably down compared with the dip in the

previous quarters of FY 2014. PSBs re-

corded a strong 15.5% increase in operating

profit (OP), while the aggregate profit after

tax (PAT) of 16 PVBs witnessed a modera-

tion in growth but still remained healthy at

13% under challenging economic conditions.

PSBs witnessed pressure on the mar-

gin in Q4 due to higher interest income

reversal on higher fresh slippage of ad-

vances into NPAs and nearly-flat cost of

funds. They also witnessed marginal de-

Banks

Asset quality worries fadingEarning of PSBs supported by core performance, while PVBsposted healthy credit growth and earning on cost-control initiatives

the CASA ratio to 44.8% from Q3, while

Axis Bank also witnessed a surge in the

CASA ratio to 45%, recording the highest

CASA ratio in the banking industry. Kotak

Mahindra, Karur Vysya and Yes Bank also

recorded healthy improvement in the

CASA ratio. However, ICICI Bank and

ING Vysya Bank recorded a decline in the

CASA ratio in Q4 over Q3. Among PSBs,

Canara Bank, Bank of Maharashtra, United

Bank, Andhra and IDBI Bank recorded a

healthy improvement in the CASA ratio.

However, the CASA ratio of Uco Bank,

Dena Bank, Syndicate Bank, Bank of In-

dia, and Bank of Baroda eased.

Both PSBs as well as PVBs recorded a

stable growth in non-interest income ex-

cluding trading income in Q4 over Q3. The

growth in non-interest income of banks

was supported by healthy growth in fee

income and forex income. The trading in-

come continued to decline sharply for the

third straight quarter, weighing on overall

non-interest income growth. The trading

income was supported by gain in the eq-

uity portfolio.

PSBs continued to be under pressure for

making provisions for NPAs and investment

depreciation. The provisions for NPAs in-

creased sharply, while one-time permission

to utilise one-third of buffer and excess pro-

visions helped to contain the NPA provi-

sion burden. Nevertheless, the higher provi-

sions for restructured advances weighed on

the overall provisions expenses. The provi-

sion rate (provisions as a percentage of op-

erating profit) for PSBs remained elevated

at 63.7% in Q4 compared with 66.5% in Q3

and 60.4% in Q4 of FY 2013. The provision

rate for PVBs rose to 14.7% in Q4 from a

low of 12.4% in Q3. It declined from 16.7%

in Q4 of FY 2013.

Both PSBs as well as PVBs exhibited

better performance. The fresh slippages in-

creased in Q4, while banks improved asset

their quality with higher recoveries and

upgradations. Further, banks also made

higher write-offs as well as scaled up sales

of bad loans to ARCs, thereby reducing the

gross NPAs (GNPAs) in Q4. Banks man-

aged to reduce their gross as well net NPAs

(NNPAs). But restructured advances in-

creased, mainly led by PVBs. The banking

industry’s GNPA ratio declined 22 bps to

3.92%, while the NNPA ratio eased 19 bps

to 2.17% in Q4. GNPA of PSBs declined 25

bps to 4.45%, while that of PVBs eased 12

bps to 1.84% in Q4.

cline in the credit-deposit (CD) ratios.

PVBs further improved the margin aided

by a sharp fall in the cost of funds.

The average net interest margin (NIM)

of 22 PSBs slipped further at 2.58% in Q4

from 2.66% in Q3 and 2.69% in Q4. The

average NIM of 14 PVBs increased to

3.55% in Q4 from 3.46% in Q3 and 3.53%

in Q4 of FY 2013.

Of the 22 PSBs, only eight including

Andhra Bank, Canara Bank and Union Bank

improved their margin, while 14, led by

PNB, Dena, Corporation, Central Bank and

United Bank of India, reported a sharp de-

cline in Q4 over Q3. Among PVBs, the mar-

gin of City Union and Karnataka Bank

dipped. The NIM of ING Vysya, Federal,

HDFC, Axis, Karur Visual and J&K Bank

improved sharply in Q4.

The aggregate current account-savings

account (CASA) deposit ratio of 40 banks

improved to 32.2% end March 2014 from

31.6% a quarter ago. It was lower compared

with 33% a year ago. The CASA ratio of 16

PVBs improved sharply to 38.2% end March

2014 from 36.8% end December 2013 and

37.6% end March 2013. Meanwhile, the

CASA ratio of 24 PSBs improved to 30.7%

end March 2014 from 30.4% a quarter ago

but declined from 31.8% a year ago.

HDFC witnessed a sharp increase in

1 5Jun 23 - Jul 06, 2014 CAPITAL MARKET

IndiaSector

About 21 PSBs reported fresh slippages

of Rs 38217 crore (3.39% annualised of ad-

vances) in Q4 as against Rs 32604 crore

(3.04% of advances) in Q3. However, the

reductions in NPAs via recoveries,

upgradations, write-offs and sale of bad loans

to ARCs jumped to Rs 39282 crore (3.48%

of advances) in Q4 from Rs 21187 crore

(1.97% of advances) in Q3.

PVBs witnessed decline in slippages of

advances. Twelve PVBs reported combined

fresh slippages of Rs 2546 crore (1.15% of

advances) in Q4. NPA reductions improved

to Rs 2853 crore (1.29% of advances).

Among PSBs, United Bank, Dena, State

Bank of Bikaner & Jaipur, IOB and Uco

Bank witnessed the highest slippage ratio,

in the range of 5% to 5.9% (annualized).

The slippages ratio of Allahabad Bank, In-

dian Bank, IDBI, Central Bank, PNB, and

Bank of India was also higher, in the range

of 4% to 4.9%. Fresh slippage ratio of SBI

stood at 2.8%, while that of Bank of Baroda,

Andhra Bank and Union Bank was relatively

lower in Q4. Among PVBs, City Union Bank

exhibited a higher slippages ratio of 4.5%,

while the rest of PVBs showed fresh slip-

page ratio of 0.4% to 1.9% in Q4.

The restructuring of advances by PSBs

remained elevated in Q4. Fresh restructur-

ing ratio remained around 2.5% (annualized

of advances) for 21 PSBs for the fourth se-

quential quarter. Among PSBs, fresh restruc-

turing ratio for Andhra Bank was substan-

tially higher at 8.7%, while that for Allahabad

Bank, Bank of Maharashtra, PNB and Ori-

ental Bank was in the range of 3.1% to 4.7%.

Among PVBs, the fresh restructuring ratio

for Federal Bank, ICICI Bank, J&K Bank

and Axis Bank stood at 2.1% to 2.9% in Q4.

Outstanding standard restructured ad-

vances of 23 PSBs remained flat for the

second straight quarter at 6.2% of their

advances end March 2014. The implemen-

tation of state electricity board restruc-

turing packages, upgradations from the re-

structuring book and slippages of restruc-

tured advances to the NPA category mainly

helped PSBs to maintain the restructured

advance portfolio. However, the standard

restructured advances of 14 PVBs in-

creased to 2.1% of their advances end

March 2014 compared with 1.9% a quar-

ter ago and 1.7% a year ago.

Central Bank, PNB, Dena Bank, Andhra

Bank and United Bank had the highest re-

structured advance portfolio among PSBs

in the range of 9.6% to 14.6% of advances.

Among PVBs, Federal Bank had the highest

restructured assets at 5.8%, followed by

Karnataka Bank at 5.6%, South Indian Bank

at 4.5%, and Karur Vysya Bank at 4.1% of

advances end March 2014.

Both PSBs end PVBs continued with

strong network expansion. About 24 PSBs

added 3,100 branches in Q4 and 7,500

branches in FY 2014. Meanwhile, PSBs also

installed more than 16,000 ATMs in Q4,

increasing the ATM-to-branch ratio to 1.4%

end March 2014 from below 1% end March

2013. PVBs opened new 627 branches in

Q4 and 2,300 branches in FY 2014. PVBs

also installed new 963 ATMs in Q4 and 4,993

ATMs in FY2014.

Outlook

The banking sector has shown a healthy

improvement in asset quality. Going for-

ward, many banks expect asset quality to

improve further. The improvement in asset

quality in Q4 was mainly aided by healthy

recoveries and write-offs. Banks also sold

bad loans to ARCs helping to improve their

asset quality. There are plans for further bad

loans sales. The implementation of early

NPA recognition norms would help to keep

check on asset quality. However, the slip-

page of restructured advances to the NPA

category remains a major concern.

Banks have been benefiting from the

stable cost of funds, while the yield on ad-

vance is witnessing pressure with competi-

tion among banks for retail lending. The

scope of the credit-deposit (CD) ratio is also

limited, restricting the hopes of NIM im-

provement. However, the improving eco-

nomic activity and lower cost of funds would

support the margin. The Reserve Bank of

India (RBI) maintained the key interest rate

steady at the monetary policy review in

June 2014 and indicated that further mon-

etary policy tightening many not be war-

ranted if inflation continues to ease.

Concerns of further increase in competi-

tion in the banking system eased after the RBI

issued only two new banking licenses early

April 2014, ending the conundrum on the num-

ber of banking licenses likely to be issued. New

licensee banks have to begin operations within

the stipulated 18-month time.

On the earning front, the non-interest

income of banks would be supported by

healthy marked-to-market treasury gains in

bonds as well as equity portfolio in Q1 of

FY 2015. The expense ratio is likely to be

stable, while the asset quality trends would

be mainly drive the provisions and the bot-

tom lines for the banks.

Subdued non-interest income growth

Banking sector aggregatesPUBLIC SECTOR BANKS PRIVATE SECTOR BANKS AGGREGATE BANKS

1403 (3) 1303 (3) VAR% 1403 (3) 1303 (3) VAR% 1403 (3) 1303 (3) VAR%Interest Earned 162219.83 142296.65 14 47595.25 42408.99 12 209815.08 184705.64 14Interest Expended 114591.59 99715.15 15 29404.81 26601.65 11 143996.40 126316.80 14Net interest income 47628.24 42581.50 12 18190.44 15807.34 15 65818.68 58388.84 13Other Income 20506.63 19104.05 7 9573.90 8361.86 14 30080.53 27465.91 10Net Total Income 68134.87 61685.55 10 27764.34 24169.20 15 95899.21 85854.75 12Operating Expenses 31117.69 29625.23 5 12365.42 10877.81 14 43483.11 40503.04 7Operating Profit 37017.18 32060.32 15 15398.92 13291.39 16 52416.10 45351.71 16Provisions & Contingencies 23594.31 19365.45 22 2260.57 2218.55 2 25854.88 21584.00 20Profit Before Tax 13422.87 12694.87 6 13138.35 11072.84 19 26561.22 23767.71 12Taxation 2194.83 425.56 416 4082.47 3033.54 35 6277.30 3459.10 81Net Profit 11228.04 12269.31 -8 9055.88 8039.30 13 20283.92 20308.61 0Key IndicatorsGross NPA 227263.9 164461.6 38 24023.25 21000.83 14 251287.1 185462.4 35Net NPA 130359.9 89950.36 45 8428.04 5781.49 46 138787.9 95731.85 45Expense Ratio (%) 45.67 48.03 -5 44.54 45.01 -1 45.34 47.18 -4Tax Rate (%) 16.35 3.35 388 31.07 27.40 13 23.63 14.55 62Figures in Rs crore. Aggregates of 26 public sector banks and 16 private sector banks.Source: Capitaline databases