PSU banks back to reporting net losses but the overall picture is much better

The mid/small private banks are the worst performers in Q2:

IDFC First Bank, YES Bank & Lakshmi Vilas Bank have reported a net loss

RBL Bank, YES Bank reported their highest deterioration in asset quality both in value & ratio wise

As mentioned in the previous qtr result update, the outlook for growth has worsened which was reflected by the slowdown in the economy. As also mentioned in the previous result update, outlook for private sector banks had weakened, it has further weakened for mid/small private banks while large private banks are going all out to grow their retail loans, seen as the key driver of growth going ahead for large lenders like HDFC Bank, ICICI Bank, and Axis Bank. Analysts continue to cut their estimates for several smaller peers like YES Bank and RBL Bank.

Losses were posted by IDBI Bank, Indian Overseas Bank, Allahabad Bank, Union Bank of India, UCO Bank, IDFC First Bank, YES Bank, Punjab & Sind Bank, Lakshmi Vilas Bank, and Axis Bank. Strong profit growth was reported by Bandhan Bank, Kotak Mah Bank, and HDFC Bank. The worst sequential performance was noted for Allahabad Bank, Union Bank of India, YES Bank, RBL Bank, and Axis Bank.

The pain came to a large extent from exposures to stressed names known in the NBFC and HFC sector, as well as from large stressed accounts like the Zee group. DHFL may prove to be a thorny account in Q3FY20 as bankers would need to treat it as an NPA if a resolution is not achieved before the quarter ends. Moreover, certain banks have already classified the account as an NPA while some others have made ad-hoc provisions towards it. The quarter also some banks like Federal Bank coping with the impact of floods in their core markets.

On average, PSU banks now have a provision coverage ratio of more than 70%. PSU Banks have also strengthened the provision coverage ratio on their NCLT accounts to >80%-90%. Recovery from these NCLT accounts will be a huge earnings booster for PSU banks in the coming quarters what with the Supreme Court upholding the right of the Committee of Creditors to decide on the distribution of resolution proceeds under IBC in the Essar Steel case.

Some of them are still in pain like IDBI Bank, PNB, Allahabad Bank, etc, but majority of them are out of the woods now.

There is a big differentiation between the men and the boys in private sector banks. While the large private banks aggressively expanding their retail reach and business, the mid and small private banks are reeling under tremendous pressure of stressed assets, rising credit costs and are in dire need of capital for survival.

With more capital coming in from the Govt, PSU banks are now in much healthier shape, barring a few like PNB and the banks under PCA. One niggling worry is that loans to stressed accounts like DHFL could turn NPAs in Q3FY20. But on the other hand, any recovery in NPAs or from stressed accounts, which is probable in H2FY20 may be a positive kicker.

Thus, while the market share of PSU banks continues to deteriorate, the outlook on profitability for most is much better now. And this could spell a better end to fiscal 2020.

Slippages are loans that turn into NPAs as payments are due for more than 90 days. The negative impact that slippages have for a bank is they lead to lower interest income while higher provisioning & thus dent the earning capacity of a bank. It’s vice-versa impact i.e. declining trend of slippages coupled with loan growth means better earning capacity of the bank.

Slippages remain elevated for top banks. However, it has declined by 12.6%QOQ for top PSU banks when compared to a decline of 0.6% QOQ for private banks. Outlook on slippages doesn’t remain too good given the fact that exposure to stressed accounts like DHFL, SME sector, etc., remains a hangover. Overall, slippages for top banks declined by 8.6%QOQ led by 12.6%QOQ increase in slippages of top PSU banks. Total slippages of the top banks declined to Rs54442 cr vs Rs59541 cr QOQ led by top PSU banks slippages at Rs34491 cr vs Rs39480 cr QOQ; while top private banks slippages were at Rs19951 cr vs Rs20061 cr QOQ.

The slippages have declined by 63.9% from Q4FY18 to Q2FY20 for top commercial banks. From Q4FY18 to Q1FY20, the PSU bank’s slippages have declined by 69.4% while that of private banks slippages have declined by 47.7%. It's more important to know that the share in slippages of PSU banks has declined from 75% in Q4FY18 to 63% in Q2FY20 while that of private banks has increased from 25% in Q4FY18 to 37% in Q2FY20.

The banking sector has reported a net profit of Rs6328 cr vs Rs 13288 cr QOQ & vs net loss of Rs 4156 cr YOY. Pvt banks have reported a profit of Rs 10514 crore, down 3%YOY & 20.2% QOQ; while PSU banks reported a net loss of Rs 4186 cr vs net loss of Rs14715 cr YOY & vs net profit of Rs147 cr QOQ.

Overall GNPA of the banking sector was at Rs9.19 lakh cr, down 5.2%YOY & 0.3%QOQ. GNPA ratio of the banking sector was at 9.95% vs 11.6%YOY & vs 10.1%QOQ. Core provision coverage ratio improved to 63.1% vs 53.6%YOY & vs 62.3%QOQ. Gross NPA of PSU banks declined 1.3%QOQ in absolute value while their Gross NPA ratio declined by 15bps QOQ. In absolute value, Gross NPA of private banks increased by 5.7%QOQ, and due to healthy loan growth around 6.3% QOQ; their GNPA ratio increased by only 6bps QOQ.

PSU banks continued to strengthen their balance sheet with provision coverage ratio (PCR) which aided the overall PCR of the banking industry to 63.1% vs 53.6% YOY & 62.3% 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. The core provision coverage ratio of private banks was at 62.2% vs 57.2%YOY & vs 62.4%QOQ. The higher provision coverage ratio meant that PSU banks, for the third time in 15 quarters, continued to report Net NPA below 5% (also aided by higher write-offs as well.

PSU banks have reported a net loss of Rs4186 cr thanks to some heavy provisioning done by the likes of UCO Bank, IDBI Bank & Other PCA banks which are fighting their way out of PCA framework. The incremental stress in the balance sheet has been reducing in terms of SMA 1 & SMA 2. Slippages have been declining for them. With government capital infusion, the majority of the banks are now well strengthened in terms of capitalization. Higher provision coverage ratio also meant that PSU banks reported Net NPA below 5% for the third time in 15 quarters and it is expected to remain below 5% henceforth. PSU banks continue to lose their market share to private banks. PSU banks have lost market share of 990 bps or 9.9% in the last 16 quarters.

The GNPA in absolute value for PSU banks declined by 1.3%QOQ to Rs7.8 lalh crore. 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% in Q3FY16 to 63.2% in Q2FY20. Treasury gains also helped to lower the net loss for PSU banks.

Net interest margin may improve in Q2FY20 for PSU Banks at large as they have been more than prudent in cutting deposit rates. Residual stress in the balance sheet is in 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.

It can be said that Q2FY20 is the first quarter where the huge difference was seen between the results of large banks & mid/small private banks. The men are now concentrating on the next leg of loan growth i.e. RETAIL sector! They are expanding their branch network, increasing workforce, spending on advertisements, etc to capture the retail market. On the other hand, mid/small private banks are now reeling under the pressure of stress in the balance sheet. Banks like YES Bank, RBL Bank have increased their credit cost guidance along with a rise in stress portfolio in the bank & deterioration in asset quality to continue. Banks like Lakshmi Vilas Bank, with CRAR at 5.5-5.7%, YES Bank, etc are in dire need of capital for survival.

The net profit for private banks was at Rs10514 cr, down 3% YOY & 27.8% QOQ. The good part is that they continue to gain market share for the 16^th qtr in a row on the back of strong capitalization. Healthy loan growth has also enabled them to make higher provisions despite an increase in provisions in Q2. The majority of the private banks saw a decline in their NIMs on a QOQ basis due to a steep rise in cost of funds. GNPA of private banks was at Rs1.4lk cr, up 5.7%QOQ. Some of the positive surprises in private bank results came from the likes of ICICI Bank, HDFC Bank & Axis Bank. Negative surprise came in from YES Bank, RBL Bank & IDFC First Bank.

Overall, the top banks in PSU & Pvt banks saw slippages declined by 8.6% QOQ to Rs54442 cr vs Rs59541 cr. Slippages declined by 12.6% QOQ for PSU banks to Rs34491 cr vs Rs39480 cr QOQ; while it declined by 0.6% QOQ for private banks to Rs19951 cr vs Rs20061 cr QOQ.

The highest increase in slippages was seen from IndusInd Bank, PNB, Union Bank of India, Kotak Mah Bank & Federal Bank. The highest decline in slippages was seen from State Bank of India, Canara Bank & Bank of India.

In absolute value, the highest increase in slippages has been from PNB, Union Bank of India, Bank of Baroda & IndusInd Bank; while a substantial decline in the absolute value of slippages was seen for SBI, Canara Bank, Bank of India & HDFC Bank.

Valuations of top banks: