Banking sector posts its first-ever profit in five quarters

Biggest losses were posted by Bank of India and IDBI Bank, while highest profit growth was seen in State Bank of India (SBI) and Axis Bank. The IL&FS exposure was a key stressed account, which majority of the lenders have classified as NPA barring a few like IndusInd Bank.

However, the worry is now spreading to exposures of these banks to companies that have been in the limelight for pledging their promoter stake, like Subhash Chandra-led Essel Group and Anil Ambani-led Reliance ADAG Group.

The market is now waiting to see how banks classify these accounts in their Q4FY19 results. Though, banks are expecting recoveries from the successful resolution of a few big insolvency account proceedings in National Company Law Tribunal (NCLT) during Q4FY19.

With deposits hard to come, the majority of banks are refraining from opening up sanctioned lines for disbursements and this could hamper business growth in Q4FY19. Many of the private banks have credit-deposit (CD) ratios of 90-95 percent, limiting their ability to lend. While the CD ratios of public sector undertaking (PSU) banks are well below 80 percent, but are on a capital conservation mode to address their balance sheet problems.

Another important development on the PSU bank front is that three banks, namely Bank of India, Oriental Bank of Commerce and Bank of Maharashtra, have been dropped from the prompt corrective action framework of RBI.

While Punjab & Sind Bank is on the verge of being put on RBI’s watch as its net NPA is higher than six percent. IDBI Bank continues to have the worst book amongst Indian banks, while IndusInd Bank has the best book as of Q3FY19.

Slippages are loans that turn into non-performing assets (NPAs) as payments are due for more than 90 days. The slippages lead a bank to lower interest income, while higher provisioning dent the earning capacity. Its vice-versa impact i.e. declining trend of slippages coupled with loan growth means better earning capacity of the bank.

On the positive side, slippages have declined massively for the banking sector and the worst was seen in Q4FY18 on account of Reserve Bank of India’s (RBI) circular on restructured loans. The declining trend of slippages means fewer losses for the banking sector.

But, for the first time in three quarters, slippages of top private sector banks increased by 14 percent QoQ. Overall, slippages for top banks have declined from Rs 1,50,775 crore in Q4FY18 to Rs 40,465 crore in Q3FY19, with PSU banks seeing a decline from Rs 1,12,639 crore to Rs 26,669 crore during the same period and private banks seeing a decline from Rs 38,136 crore Q4FY18 to Rs 13,796 crore in Q3FY19.

The slippages have declined by 73 percent from Q4FY18 to Q3FY19 for top commercial banks. From Q4FY18 to Q3FY19, the PSU bank’s slippages have declined by 76 percent, while for private banks, slippages have declined by 64 percent.

Further, the share in slippages of PSU bank's has declined from 75 percent in Q4FY18 to 66 percent in Q3FY19, while that of private banks have increased from 25 percent in Q4FY18 to 34 percent in Q3FY19. However, for the first time in the last three quarters, slippages of top private banks have increased by 14 percent QoQ as against a decline of 12.5 percent for top PSU banks.

For the first time in five quarters, listed Indian banks have registered profits. However, PSU banks continued with their net loss momentum for eight quarters in a row, while private banks reported their highest net profit in the last six quarters.

The overall banking sector saw a decline of 3.3 percent QoQ in its gross non-performing assets (GNPA) to Rs 9.67 lakh crore against Rs 10 lakh crore in Q2FY19. Gross NPA ratio was at 10.81 percent against 11.39 percent QoQ, down 58 bps. Gross NPA of PSU banks declined by 4.1 percent QoQ in absolute value, while their Gross NPA ratio improved by 65 bps. However, in absolute value, gross NPA of private banks increased by 2.1 percent QoQ, but due to healthy loan growth around 5.2 percent QoQ saw a decline in gross NPA ratio by 13 bps QoQ.

As PSU banks continued to strengthen their balance sheet, overall provision coverage ratio (PCR) of the banking industry stood at 56.6 percent against 47 percent YoY and 53.5 percent QoQ. This PCR is without technical write off. A higher coverage ratio spells a stronger balance sheet to sustain sudden jolts on NPAs or stressed assets. Core provision coverage ratio of PSU banks stood at 56 percent against 53 percent QoQ, while that of private banks was at 60.9 percent against 57.3 percent QoQ.

The state-run banks have reported a net loss of Rs 11,598 crore against Rs 14,716 crore, down 21.2 percent QoQ. The PSU banks have reported net losses for 10 quarters out of the last 13 quarters totalling to Rs 1,60,152 crore. This was on the back of lower sequential slippages, but higher provisions made especially by banks under PCA framework of RBI.

However, loan growth remains muted for PSU banks and they continue to lose market share to private banks. State-run banks have lost market share of 900ps or nine percent in the last 13 quarters. PSU banks market share now stood at 65.6 percent in Q3FY19 against 74.6 percent in Q3FY16.

The GNPA in absolute value for PSU banks has decreased to Rs 8.3 lakh crore in Q3FY19 against Rs 8.7 lakh crore in Q2FY19, down 4.1 percent QoQ. They have been more prudent in improving their provision coverage ratio. The core provision coverage ratio (i.e. provision coverage ratio without technical write off) has improved for PSU banks from 41.3 percent in Q3FY16 to 56 percent in Q3FY19, up 14.70 percent.

Treasury gains also helped lower the net loss for state-run banks. PSU bankers have said that they expect further recovery from NCLT list accounts in Q4FY19. The profitability of PSU banks was also hit on account of higher provisions for gratuity and pension. One of the best things to happen in this quarter, despite all the bad results, is that residual stress in the balance sheet is down to single digits (as % of the loan book). This is perhaps the lowest ever residual stress in the balance sheet of PSU banks over the last 3-5 years.

The gross NPA of bank's under PCA declined to Rs 3.36 lakh crore against Rs 3.49 lakh crore, down 3.8 percent QoQ. The share in GNPA declined to 34.8 percent from 35 percent QoQ. Loan growth continued to decline for PCA based banks. Loan book was at Rs 15.24 lakh crore, down 3.4 percent QoQ. Due to shrinkage in their balance sheet, their credit book market share has declined to 16.77 percent against 17 percent QoQ.

CRAR less than 10.25 percent, but equal or more than 7.75 percent.

CRAR less than 7.75 percent, but equal or more than 6.25 percent.

CRAR less than 312.5 bps below nine percent requirement.

Net NPAs more than six percent, but less than nine percent.

Net NPAs over 10 percent, but less than 15 percent.

Net NPAs 15 percent and above.

Negative Return on assets for 2 years.

Negative Return on assets for 3 years.

Negative Return on assets for 4 years.

Tier I leverage ratio of more than 25x.

Tier I leverage ratio of more than 28.6x.

Banks cannot grow aggressively as they need to improve their asset quality.

Once PCA is triggered, the bank faces restrictions on expenses such as opening branches, recruiting staff and giving increments to employees. Further, the bank can disburse loans only to those companies whose borrowing is above investment grades.

Lenders will also not be able to pick up capital from the market, but mostly from government and PSU agencies (Like LIC).

The net profit for private banks stood at Rs 11,961 crore, up 3.7 percent year-on-year (YoY) and 13.3 percent QoQ. The quarterly profits of private banks are on the higher side in the last six quarters. The worrying factor amongst private banks was that they saw an increase in the absolute value of gross NPA QoQ for the fourth quarter in a row.

Gross NPA was at Rs 1.33 lakh crore, up 2.1 percent QoQ. The good part is that they continue to gain market share on the back of strong loan growth, which has also enabled them to make higher provisions to improve their net NPA. Loan growth was at 5.2 percent QoQ, which led to better income for the private banks. Net NPA of private banks was at Rs 52,126 crore, down 6.7 percent QoQ. Some of the positive surprises in private bank results came from the likes of ICICI Bank, Axis Bank, Federal Bank and Ujjivan SFB. The negative surprise came in from Yes Bank, IDFC Bank and Bandhan Bank.

Overall, the top PSU and private banks saw slippages declined by five percent QoQ to Rs 40,465 crore from Rs 42,590 crore. Slippages declined by 12.5 percent QoQ for PSU banks to Rs 26,669 crore against Rs 30,463 crore, while it increased by 13.8 percent QoQ for private banks to Rs 13,796 crore against Rs 12,127 crore QoQ.

The highest increase in slippages was seen from IndusInd Bank, Yes Bank and Canara Bank. Highest decline in slippages was seen from SBI, ICICI Bank and Punjab National Bank. In the absolute value, the highest increase in slippages was seen from Canara Bank, Axis Bank and HDFC Bank, while a substantial decline in absolute value of slippages was seen for SBI, Punjab National Bank and ICICI Bank.

Public sector banks are trading at a price-to-book value (P/BV) of less than 1x. While HDFC Bank and Kotak Mahindra Bank are the most valued stocks, Union Bank of India has the lowest valuation amongst peers.