Private banks' Q1 review: Overall net profit declines; interest, income up

Illustration by Binay Sinha
Private sector banks saw a mixed performance for Q1FY19. ICICI Bank posted its first-ever loss and Axis Bank’s net profit reduced to half of the previous year’s June quarter even as others showed a steady growth. Provisioning for bad loans continued to weigh on banks’ profitability along with bond losses as well as a slower income growth.

As per a CARE rating report, the total net profit of private sector banks declined by 18.8 per cent in June 2018 against a rise of 13.3 per cent in the previous year. While both interest and other income grew during the year, it was at a slower pace than last year’s growth.

Asset quality, in terms of GNPA ratio, for most private players during the quarter showed marginal improvement sequentially. However, it was still significantly higher over year-ago quarter levels.

Total gross NPA ratio for the private banks during the quarter stood at 4.5 per cent against 4.06 per cent in June 2017.

“Gross NPAs increased however at a comparatively lower rate in Q1 FY19 as compared to Q1 FY18. This could be due to lower incremental NPAs being generated. However, it is still not clear if all legacy NPAs have been recognized by all banks,” said CARE ratings.

The private sector banks with the most asset quality trouble, ICICI Bank and Axis Bank, said that this quarter’s slippages were the lowest since the past few years. “Large part of the NPA recognition is done and the incremental slippages have been moderate. Banks may also see significant recoveries from the NLCT process,” said Karthik Srinivasan, senior vice president, ICRA.

The banks also saw elevated provisions during the quarter on account of bad loans and Mark To Market (MTM) losses. All of the banks made full provision for MTM losses in the current quarter and did not avail of RBI’s dispensation of spreading it across four quarters.

Provisions by private banks grew 62 per cent in Q1FY19 against 23 per cent in Q1FY18. The provision coverage ratio also improved from previous levels to above 60 per cent across most private sector banks.

“As per RBI’s timelines, the NCLT list 1 and 2 will be resolved by this calendar year or FY20 at the latest. The banks have provided over 50% on these accounts and unless the haircut is greater than the provisions, banks are likely to see writebacks," said Srinivasan.

The bank’s profits and NIMs were supplemented by significant recoveries of bad loans and the resolution of Bhushan Steel. Going forward, the banks’ guided towards pressure on NIMs. While interest income grew by 17% yoy for the quarter, interest expenses grew by 19%.

Most banks, including HDFC Bank, IndusInd Bank, RBL Bank and Federal Bank, said they saw corporate loan growth of over 20 per cent from the previous year’s quarter. However, ICICI Bank and Axis Bank saw a corporate loan growth of 4.9 per cent and 6 per cent. The banks are more cautious on the corporate lending front, focusing on a more quality led growth. The new loans are mostly to corporates rated BB and above, said the banks. Banks are also deliberately going slow on some sectors to prevent risk concentration. However, retail growth continued to be strong across the banks supplemented by a fast growth of unsecured loans.

Srinivasan said that the quality of incremental lending by banks would be a factor to watch out for in the coming quarters.

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